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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 Commission file number 1-13293 The Hillman Companies, Inc. 
  Delaware
    
    23-2874736(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 10590 Hamilton Avenue
Cincinnati, Ohio
    
    45231(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number, including area code:
    
    (513) 851-4900
 Securities registered pursuant to Section 12(b) of the Act: Title of Class
    
    Name of Each Exchange on Which Registered11.6% Junior Subordinated Debentures
Preferred Securities Guaranty
    
    None
 Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). o þ
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  þ On March 25, 2005, there were 6,212.9 Class A Common Shares issued and outstanding, 1,000.0 Class B
Common Shares issued and outstanding, 2,787.1 Class C Common Shares issued and outstanding,
82,104.8 Class A Preferred Shares issued and outstanding by the Registrant and 57,282.4 Class A
Preferred Shares issued and outstanding by the Hillman Investment Company and 4,217,724 Trust
Preferred Securities issued and outstanding by the Hillman Group Capital Trust. The Trust
Preferred Securities trade on the American Stock Exchange under symbol HLM.Pr. The aggregate
market value of the Trust Preferred Shares held by non-affiliates at June 30, 2004 was
$113,878,548.




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PART I Item I  Business. General The Hillman Companies, Inc. (Hillman or the Company) is one of the largest providers of
hardware-related products and related merchandising services to retail markets in North America.
The Companys principal business is operated through its wholly-owned subsidiary, The Hillman
Group, Inc. (the Hillman Group) which had sales of approximately $352 million in 2004. The
Hillman Group sells its products to hardware stores, home centers, mass merchants, pet supply
stores, and other retail outlets principally in the United States, Canada, Mexico and South
America. Product lines include thousands of small parts such as fasteners and related hardware
items; keys, key duplication systems and accessories; and identification items, such as, tags and
letters, numbers, and signs. The Company supports its product sales with value added services
including design and installation of merchandising systems and maintenance of appropriate in-store
inventory levels. The Company headquarters is located at 10590 Hamilton Avenue, Cincinnati, Ohio. The Company
maintains a website athttp://www.hillmangroup.com. Information contained or linked on our website
is not incorporated by reference into this annual report, and you should not consider any such
information to be a part of this annual report. Background On March 18, 2002, SunSource Inc., a Delaware corporation (SunSource), as a result of the
acquisition of a majority of SunSource common stock by Allied Capital Corporation in September 2001
as discussed below, changed its name to The Hillman Companies, Inc., which reflects its predominant
business as one of the largest providers of hardware-related products and related merchandising
services to the retail markets in North America. In connection with the SunSource name change,
SunSource Capital Trust, which has 4.2 million Trust Preferred Securities outstanding and trading
on the American Stock Exchange under the symbol HLM.Pr, changed its name to the Hillman Group
Capital Trust. On September 26, 2001, SunSource Inc. was acquired by Allied Capital Corporation (Allied Capital)
pursuant to the terms and conditions of an Agreement and Plan of Merger dated as of June 18, 2001,
by and among Allied Capital, Allied Capital Lock Acquisition Corporation and SunSource. Allied
Capital acquired approximately 96.8% of the Company and certain members of management and other
stockholders continued as stockholders of the Company after the merger. The total transaction
value was $74.0 million or $10.375 per SunSource common share, consisting of the cash purchase
price paid for the outstanding common stock of the Company aggregating approximately $71.5 million
and management and other stockholders common shares valued at approximately $2.5 million.
SunSource was the surviving entity in the merger and organized as an independently managed
portfolio company of Allied Capital. In connection with the transaction, on September 28, 2001, the Company completed the sale of
substantially all of the assets of its SunSource Technology Services business (the STS Business)
to STS Operating, Inc. (STS OP), an entity formed by certain officers and managers of the STS
Business, Allied Capital and Easton Hunt Capital Partners, L.P. for the purpose of acquiring the
STS Business. STS OP purchased the assets of the STS Business including the rights to the name
SunSource from SunSource Technology Services, LLC, a wholly-owned subsidiary of SunSource, pursuant
to an Asset Purchase Agreement, dated September 28, 2001, by and between SunSource Technology
Services, LLC and STS OP. The purchase price aggregated approximately $25.5 million in cash and
preferred stock of STS OP, subject to post-closing adjustments, plus the assumption of certain
liabilities. On October 16, 2002, Hillmans equity investment in STS OP preferred stock and $0.2
million of cash was distributed to the Companys common stockholders. On March 2, 2000, the Company contributed its Kar Products operations to a newly formed partnership
affiliated with Glencoe Capital LLC (Glencoe). Glencoe contributed cash equity to the new
partnership in exchange for a 51% controlling interest with the remaining 2




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minority interest retained by SunSource. The Company received $105 million in cash proceeds from the transaction
through repayment of assumed debt by the new partnership, GC-Sun Holdings, L.P. (G-C). On October 4, 2000, G-C acquired all of the outstanding stock of Brampton
Fastener Co. Limited (d/b/a Brafasco). On January 4, 2002, G-C provided the Company notice that it
intended to exercise its call right to purchase the Companys partnership interest as a result of
the merger transaction with Allied Capital. On April 13, 2002, the Company entered into a Unit
Repurchase Agreement with G-C, pursuant to which G-C exercised its call right. In exchange for its
interest in G-C, the Company received a $10 million subordinated note from G-C. The G-C note was
distributed to the Companys common stockholders on March 31, 2004. On May 1, 2002, the Company purchased certain assets of the Lowes specialty fastener business from
R&B, Inc. for cash consideration of $6.2 million. In connection with this transaction, the Company
settled litigation filed by R&B, Inc. in February 1996 related to the Companys sale of the Dorman
Products division. On October 3, 2002, the Company, through its Hillman Group subsidiary, purchased the net assets of
the DIY division (DIY) of the Fastenal Company of Winona, MN (Fastenal). DIY distributed
fasteners, anchors, picture hanging wire, hooks, tacks, and brads to national hardware cooperatives
and home centers. The Company paid $15.3 million in cash to Fastenal for the net assets of DIY. On March 31, 2004, Hillman was acquired by an affiliate of Code Hennessy & Simmons LLC (CHS).
Pursuant to the terms and conditions of the related Agreement and Plan of Merger (Merger
Agreement), dated as of February 14, 2004, the Company was merged with an affiliate of CHS with
the Company surviving the merger (Merger Transaction). The total consideration paid in the
Merger Transaction was $511.6 million including the repayment of outstanding debt and the value of
the Companys outstanding Trust Preferred Securities. As a result of the change of control, an affiliate of CHS owns 49.1% of the Companys common stock
and 54.5% of the Companys voting common stock, Ontario Teachers Pension Plan (OTPP) owns 27.9%
of the Companys common stock and 31.0% of the Companys voting common stock and HarbourVest
Partners VI owns 8.7% of the Companys common stock and 9.7% of the Companys voting common stock.
Certain members of management own 14.1% of the Companys common stock and 4.5% of the Companys
voting common stock. For a discussion of the Companys capital stock, see Note 13, Common and
Preferred Stock, of Notes to Consolidated Financial Statements. For additional information on certain of the transactions, see Item 7 - Managements Discussion
and Analysis of Financial Conditions and Results of Operations. Industry Overview Hillman operates in multiple channels of the retail marketplace such as hardware stores, national
and regional home centers and mass merchants. Hillman focuses on delivering merchandising systems,
point-of-sale displays, product support and sales installation services through its nationwide
field sales and service force to the retail sector. These retail channels have experienced significant change as a result of the growth of the large
national big box (Big Box) chains (defined as mass merchants, home centers and large-format
grocery/drug centers), which have taken market share from the regional home centers and independent
hardware dealers and cooperatives. Hillman has developed sales, marketing, merchandising and
service specifically to meet the needs of the Big Box chains. Hillman believes that its market
knowledge, merchandising skills, breadth of inventory, and value-added services, including superior
support and fulfillment capabilities, will enable the Company to prosper with the Big Box chains. The Hillman Group The Company is organized as a single business segment, the Hillman Group. With annualized sales of
approximately $352 million, the Hillman Group believes it is the leading provider 3




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of fasteners and related small hardware items; keys, key duplication systems and related accessories, and
identification items, such as tags and letters, numbers and signs (LNS) to retail outlets in
North America. Retail outlets served by Hillman include hardware stores, home centers, mass
merchants, pet supply stores, grocery stores and drug stores. Through its field sales and service organization, Hillman complements its extensive product
selection with value-added services for the retailer. Sales and service representatives regularly visit retail outlets to review stock levels, reorder
items in need of replacement, and interact with the store management to offer new product and
merchandising ideas. Thousands of items can be actively managed with the retailer experiencing a
substantial reduction in paperwork and labor costs. Service representatives also assist in
organizing the products in a consumer-friendly manner. Hillman complements its broad range of
products with value-added merchandising services such as displays, product identification stickers,
retail price stickers, store rack and drawer systems, assistance in rack positioning and store
layout, and inventory restocking services. Hillman regularly introduces new products and package
designs with color-coding for ease of shopping by consumers and modifies rack designs to improve
the attractiveness of individual store displays. In effect, Hillman functions as a merchandising
manager for retailers, supporting these services with high order fill rates and rapid delivery from
its twelve distribution centers across the United States and Canada. Currently, orders are shipped
within 48 hours with a 97% order fill rate. The Company ships its products from twelve strategically located distribution centers in the U.S
and Canada (See Item 2 - Properties). In 2002, Hillman invested $9.8 million in a state of the art
distribution facility in Cincinnati, Ohio. In addition to improving order turnaround time and
reducing labor costs, the new facility provides additional capacity to accommodate future sales
growth. In 2004, the Company moved into a new facility in Lewisville, Texas and the implementation
of warehouse management technology was completed in December. A similar undertaking was started on
the Shafter, California facility with an expected completion date of April 2005. Hillman also manufactures and markets a value-added mix of high-tech and conventional products in
two core product categories: key duplication systems and identification systems. The
patent-protected Axxess Precision Key Duplication System has proven to be a profitable revenue
source within Big Box retailers. The technology developed for this system revolutionized the key
duplicating process utilizing computer aided alignment, indexing and duplication of keys. This
system has been placed in over 13,900 retail locations to date and is supported by Hillman sales
and service representatives. In addition, Hillman offers a commercialized, innovative, consumer-operated vending system,
Quick-Tag, which provides custom engraved specialty items, such as pet identification tags,
luggage tags and other engraved identification tags. To date, more than 3,250 Quick-Tag machines
have been placed in retail locations which are being supported by Hillmans sales and service
representatives. Products and Suppliers Currently, Hillman purchases its products from approximately 650 vendors, the largest of which
accounted for approximately 10% of the Groups annual purchases and the top five of which accounted
for 34% of its purchases. About half of its purchases are from overseas suppliers, with the
balance from domestic manufacturers and master distributors. Hillmans vendor quality control
procedures include on-site evaluations and frequent product testing. Vendors are also evaluated
based on delivery performance and the accuracy of their shipments. Fasteners Hillmans fastener product line encompasses standard and specialty nuts, bolts, washers, screws,
anchors and picture hanging items. The line also includes brass, nylon, stainless steel, chrome
and galvanized and other miscellaneous fasteners. The depth of the line, over 37,500 products, is
believed to be the largest among suppliers servicing the hardware retail segment. Fasteners
generated 56.7% of total revenue in 2004. 4




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Keys and Key Accessories Hillman provides a competitive line of metal key products for major retailers and the automotive
sector. Hillman manufactures two metal key duplication systems that are niche-marketed to retail
outlets, primarily mass merchants and home centers, and a code cutting system for use in automotive
dealerships and in vehicle fleet environments. The Axxess Precision Key Duplication System creates high quality duplicate keys with the precision
of a locksmith while minimizing the technical skill required by operators. The system was
developed in response to retailers needs for reducing the miscut rate on keys. Axxess keys provide
retailers with nearly ten times more gross profit per square foot than the average of all products
sold in grocery and mass merchant channels. Hillman also markets a conventional key cutting system. The styles of keys marketed include
standard brass keys, Wackeys, NFL, MLB, NCAA logo keys, Color Plus keys, rubber head keys, and
high security vehicle anti-theft key blanks. The conventional system is marketed to retailers who
do not experience high employee turnover and therefore do not have the same labor constraints as
mass merchants, home centers or grocery and drug retailers. The key cutting system developed for the automotive industry, PC+ Code Cutter, produces automobile
keys using alphanumeric codes based on a vehicles identification number. Utilizing a proprietary
computer program, the PC+ Code Cutter identifies and then cuts keys based on the automobiles
original key pattern. The PC+ Code Cutter is distributed through Barnes Distribution, a
distribution company serving vehicular and industrial markets. Since its introduction in February
1996, more than 7,900 PC+ Code Cutter and 2,800 of the new Flash Code Cutter systems have been
sold. Hillman also markets key accessories in conjunction with its key duplication systems. Popular
accessories include the Key Light, Valet KeyChain, Fanatix key identifiers, key coils and key
clips. The Key Mates line of key accessories includes a broad range of products such as key
chains, tags, lights, floats, holders, whistles, and a host of other miscellaneous complementary
items. Revenues for keys, key accessories, and the PC+ Code Cutter represented 26.3% of total
revenues in 2004. Engraving Quick-Tag is a patented, state-of-the-art consumer-operated vending system that custom engraves
specialty products such as pet identification tags, military-style I.D. tags, holiday ornaments and
luggage tags. Hillman initially targeted the pet identification market with its Quick-Tag system,
and has facilitated the process of obtaining a pet tag by providing pet owners with a quick and
highly convenient means to custom engrave tags while shopping at large format retail stores such as
Wal-Mart and PETsMART. Hillman has developed other high impact applications for its Quick-Tag
interactive engraving technology, including luggage tags, key chains and military-style
identification tags. The Company has placed over 3,250 Quick-Tag machines in retail outlets
throughout the United States and Canada. Using an interactive touch screen, customers input
information such as a pet name and telephone number, and the systems proprietary technology
engraves the tag in less than two minutes. The Quick-Tag system does not require incremental labor
and generates high levels of customer satisfaction and attractive margins for the retailer. The
Quick-Tag custom engraving systems generate retail profit per square foot over seven times the
typical retail average. Revenues for engraving products represented 8.4% of total revenues in
2004. Hillman purchases a wide variety of materials and components to manufacture the Axxess Key
Duplication and Quick-Tag engraving machines, many of which are manufactured to its specifications.
Management does not believe that it is overly dependent on any one supplier. The machine
components do not generally require proprietary technology and Hillman has identified or used
alternate suppliers for its primary sourcing needs. 5




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Letters, Numbers and Signs (LNS) The LNS program offers an extensive collection of items for both domestic and commercial use such
as packaged self-adhesive letters and numbers, mailbox numbers and accessories, house numbers and
letters, contractor safety program signs, and driveway markers and reflectors. Typical retailers
dedicate eight linear feet of retail space for this product and view it as a significant
contributor to their retail offerings. Hillman also offers a variety of merchandisers and program configurations for this line. LNS sales accounted
for 8.6% of 2004 revenues. Markets and Customers Hillman sells its products to national accounts such as Wal-Mart, Home Depot, Lowes, Sears,
Tractor Supply, PETsMART, and PetCo. Hillmans status as a national supplier of unique,
proprietary products to Big Box retailers allows it to develop a formidable market position and
high barriers to entry within its product categories. Management believes that the dynamics, which
make its services attractive to hardware retailers, are present with these larger customers as
well. Hillman services approximately 15,000 franchise and independent (F&I) retail outlets. These
individual dealers are typically members of the larger cooperatives, such as Tru-Serv, Ace and
Do-it-Best. The Company sells directly to the cooperatives retail locations and also supplies
many fastener items to the cooperatives central warehouses. These central warehouses distribute
to their members that do not have a requirement for Hillmans in-store service. These arrangements
reduce credit risk and logistic expense for Hillman and reduce central warehouse inventory and
delivery costs for the cooperatives. A typical hardware store maintains in inventory thousands of different items, many of which
generate small dollar sales but large profits. It is difficult for a retailer to economically
monitor all stock levels and to reorder the products from multiple vendors. The problem is
compounded by the necessity of receiving small shipments of inventory at different times and having
to stock the goods. However, failure to have these small items available will have an adverse
effect on store traffic, thereby denying the retailer the opportunity to sell items that generate
higher dollar sales. Hillman sells its products to approximately 20,000 customers, the top five of which accounted for
44.0% of its annualized sales. Lowes is the single largest customer, representing 17.7% of total
sales, Home Depot is the second largest at 10.4% and Wal-Mart is the third largest at 10.2%. No
other customer accounted for more than 10% of the Companys total sales in 2004. Hillmans telemarketing activity sells to approximately 6,700 smaller hardware outlets and over
6,000 non-hardware accounts. New business is also being pursued internationally in such places as
Canada, Mexico, South and Central America, and the Caribbean. Sales and Marketing Management believes that Hillman provides unmatched product support, customer service and profit
opportunities for its retail distribution partners. It also believes that a significant source of
its competitive advantage rests in its ability to provide a greater level of customer service than
its competitors. Hillman products are covered directly by the combined field service organization,
which provides service support through field visits. These field visits provide Hillman with
critical information relating to consumer buying patterns and retailing trends, and complements
their new product development efforts. Field service representatives also help retail customers to
improve the efficiency and profitability of Hillmans on-site merchandising systems by consulting
with customers in the areas of EDI, product planning, inventory control, systems interface and
store operations. The national accounts field service organization consists of over 395 service people and 23 field
managers focusing on Big Box retailers, pet super stores, large national discount chains and
grocery stores. This organization reorders products, details store shelves and sets up in-store
promotions. 6




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Management believes the Company consistently is able to be responsive to the needs of the F&I
retailers because it employs the largest direct sales organization in the retail home industry.
This organization consists of 226 people, managed by 17 field managers. Each sales representative
is responsible for approximately 50 full service accounts that they call on approximately every two
weeks. Coupled with the efforts of the Marketing Department, the sales force not only sells
products, but can sell merchandising and technological support capabilities as well. The Marketing
Department provides support through the development of new products, sales collateral, promotional
items, merchandising aids and marketing services such as advertising and trade show management.
Its electronic data interchange (EDI) system is used by a number of its large customers for handling of orders
and invoices. Competition The primary competitors in the national accounts marketplace for fasteners are Crown-Bolt, R&B,
Inc. and the Newell Group. Competition is based primarily on in-store service and price. Other
competitors are local and regional distributors. The principal competitors for Hillmans F&I business are Midwest Fasteners, Serv-A-Lite and Hyko in
the hardware store marketplace. The first two carry mainly fastener products, while the latter is
the major competitor in LNS products. Hillman competes primarily on field service, merchandising,
as well as product availability, price and breadth of product line. Management estimates that Hillman sells to approximately 65% of the full service hardware stores in
the F&I marketplace. The hardware outlets that purchase products but not services from Hillman
also purchase products from local and regional distributors and cooperatives. Competition in the
F&I marketplace is primarily on the basis of price and availability. Hillman competes with Hyko for LNS sales in hardware stores, home centers and mass merchants.
Competitors in the pet tag market are specialty retailers, direct mail order and retailers with
in-store mail order capability. The Quick-Tag system has patent protected proprietary technology
that is a major barrier to entry and preserves this market segment. Risk Factors An investment in the Companys securities involves certain risks as discussed below. However, the
risks set forth below are not the only risks the Company faces, and it faces other risks which have
not yet been identified or which are not yet otherwise predictable. If any of the following risks
occur or are otherwise realized, the Companys business, financial condition and results of
operations could be materially adversely affected. You should consider carefully the risks
described below and all other information in this annual report, including the Companys financial
statements and the related notes and schedules thereto, prior to making an investment decision with
regard to the Companys securities. The Company operates in a highly competitive industry, which may have a material adverse effect on
its business, financial condition and results of operations. The retail industry is highly competitive, with the principal methods of competition being price,
quality of service, quality of products, product availability, credit terms and the provision of
value-added services, such as merchandising design, in-store service and inventory management. The
Company encounters competition from a large number of regional and national distributors, some of
which have greater financial resources than the Company and may offer a greater variety of
products. If these competitors are successful, the Companys business, financial
condition and results of operations may be materially adversely affected. The Companys business, financial condition and results of operations may be materially adversely
affected by seasonality and general economic conditions affecting its sales. Hillman has, in the past, experienced seasonal fluctuations in sales and operating results from
quarter to quarter. Typically, the first calendar quarter is the weakest due to the effect of
weather on home projects and the construction industry. 7




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The Companys profitability may be materially adversely affected as a result of consolidation in
the retail trade industry. With the trend toward retail trade consolidation, the Company is increasingly dependent upon key
retailers whose bargaining strength is growing. Accordingly, the Company faces greater pressure
from its retail trade customers to provide more favorable trade terms. The Companys profitability
may be negatively affected by changes in the policies of its retail trade customers. Changes in general economic conditions could also have a material adverse effect on the Companys
sales. The Companys success is highly dependent on information and technology systems. The Company believes that its proprietary computer software programs are an integral part of its
business and growth strategies. Hillman depends on its information systems to process orders, to
manage inventory and accounts receivable collections, to purchase, sell and ship products
efficiently and on a timely basis, to maintain cost-effective operations and to provide superior
service to its customers. There can be no assurance that the precautions which the Company has
taken against certain events that could disrupt the operations of its information systems will
prevent the occurrence of such a disruption. Any such disruption could have a material adverse
effect on the Companys business and results of operations. These factors could have a material adverse affect the Companys business, financial condition and
results of operations. The inability to make timely and cost effective acquisitions may adversely affect the Companys
business. An element of Hillmans future growth strategy is to pursue selected acquisitions that either
expand or complement its businesses in new or existing markets. However, there can be no assurance
that the Company will be able to identify or acquire acceptable acquisition candidates on terms
favorable to the Company and in a timely manner, if at all, to the extent necessary to fulfill
Hillmans growth strategy. Furthermore, there can be no assurance that competition for acquisition
candidates will not escalate, thereby increasing the costs of acquisitions. The process of
integrating acquired businesses into the Companys operations may result in unforeseen difficulties
and may require a disproportionate amount of resources and managements attention, and there can be
no assurance that Hillman will be able to successfully integrate acquired businesses into its
operations. Insurance Arrangements Under the Companys current insurance programs, commercial umbrella coverage is obtained for
catastrophic exposure and aggregate losses in excess of expected claims. Since October 1991, the
Company has retained the exposure on certain expected losses related to workers compensation,
general liability and automobile. The Company also retains the exposure on expected losses related
to health benefits of certain employees. The Company believes that its present insurance is
adequate for its businesses. See Note 18, Commitments and Contingencies, of Notes to Consolidated
Financial Statements of the Company as of and for the three years ended December 31, 2004. Employees As of December 31, 2004, the Company had 1,794 full time and part time employees. In the opinion
of management, employee relations are good. Backlog The Companys sales backlog from ongoing operations was $3.1 million as of December 31, 2004, and
$2.6 million as of December 31, 2003. 8




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Where You Can Find More Information The Company files quarterly reports on Form 10-Q, annual reports on Form 10-K and special reports
on Form 8-K, and other information with the Securities and Exchange Commission (the Commission).
You may read and copy any reports, statements, or other information filed by the Company at the
Commissions public reference rooms at 450 5th Street, N.W., Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for more information on the public reference rooms.
The Commission also maintains an Internet site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers, like Hillman, that file
electronically with the Commission. Copies may also be obtained, after paying a duplicating fee,
by electronic request to publicinfo@sec.gov or by written request to Public Reference
Section, Washington, D.C. 20549-0102. You can inspect reports, proxy statements, and other information about the Company at the offices
of The American Stock Exchange, 86 Trinity Place, New York, NY 10006. 9




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Item 2  Properties.  The Companys principal office, manufacturing and distribution properties are as follows: ApproximateLocation
    
    Square Footage
    
    DescriptionCincinnati, Ohio
    
    240,000
    
    Office, DistributionForest Park, Ohio
    
    260,000
    
    DistributionTempe, Arizona
    
    161,000
    
    Mfg., DistributionTempe, Arizona
    
    47,000
    
    OfficeShafter, California
    
    84,000
    
    DistributionLewisville, Texas
    
    72,000
    
    DistributionWilsonville, Oregon
    
    29,000
    
    DistributionCharlotte, North Carolina
    
    40,000
    
    DistributionGreen Island, New York
    
    56,000
    
    DistributionLaCrosse, Wisconsin
    
    48,000
    
    DistributionRiviera Beach, Florida
    
    37,000
    
    DistributionGoodlettsville, Tennessee
    
    72,000
    
    Mfg., DistributionMississauga, Ontario
    
    11,000
    
    Distribution
 With the exception of Goodlettsville, Tennessee, all of the Companys facilities are leased. In
the opinion of management, the Companys existing facilities are in good condition. Item 3  Legal Proceedings. Legal proceedings are pending which are either in the ordinary course of business or
incidental to the Companys business. Those legal proceedings incidental to the business of the
Company are generally not covered by insurance or other indemnity. In the opinion, of management,
the ultimate resolution of the pending litigation matters will not have a material adverse effect
on the consolidated financial position, operations or cash flows of the Company. Item 4  Submission of Matters to a Vote of Security Holders. The Company did not submit any matters to a vote of Trust Preferred holders during the quarter
ended December 31, 2004. 10




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Part II Item 5 
Market for Registrants Common Shares and Related Stockholder Matters.  Stock Exchange Listing
 The Companys common stock does not trade and is not listed on or quoted in an exchange or other
market. However, the Trust Preferred Securities trade under the ticker symbol HLM.Pr on the
American Stock Exchange. The following table sets forth the high and low closing sale prices on the
American Stock Exchange composite tape for the Trust Preferred Securities. 2004
    
    High
    
    
    LowFirst Quarter
    
    $
    27.50
    
    
    $
    26.15Second Quarter
    
    
    27.55
    
    
    
    26.50Third Quarter
    
    
    27.70
    
    
    
    26.80Fourth Quarter
    
    
    29.45
    
    
    
    27.40
 2003
    
    High
    
    
    LowFirst Quarter
    
    $
    25.85
    
    
    $
    25.00Second Quarter
    
    
    27.00
    
    
    
    25.14Third Quarter
    
    
    26.95
    
    
    
    26.00Fourth Quarter
    
    
    27.04
    
    
    
    26.20
 The Trust Preferred
Securities have a liquidation value of $25.00 per security. As of March 22,
2005, there were 731 holders of Trust Preferred Securities and fifteen (15) common stockholders.
The total number of Trust Preferred Securities outstanding as of March 25, 2005, was 4,217,724.
The total number of shares of Common Stock outstanding as of March 25, 2005, was 10,000. Distributions The Company pays interest to the Hillman Group Capital Trust (the Trust) on the Junior
Subordinated Debentures underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the aggregate. The Trust
distributes an equivalent amount to the holders of the Trust Preferred Securities. For the years
ended December 31, 2004 and 2003, the Company paid $12.2 million per year in interest on the Junior
Subordinated Debentures, which was equivalent to the amounts distributed on the Trust for the same
periods. The interest payments on the Junior Subordinated Debentures underlying the Trust Preferred
Securities are deductible for federal income tax purposes by the Company under current law and will
remain an obligation of the Company until the Trust Preferred Securities are redeemed or upon their
maturity in 2027. For more information on the Trust and Junior Subordinated Debentures, see Item 7-Managements
Discussion and Analysis of Financial Condition and Results of Operations. Issuer Purchases of Equity Securities The Company made no repurchases of its equity securities during 2004. 11




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##### 



Item 6  Selected Financial Data. As a result of the Merger Transaction, the Companys operations for the periods presented
subsequent to the September 30, 2001 acquisition by Allied Capital but prior to March 31, 2004 are
referenced herein as the predecessor operations (the Predecessor or Predecessor Operations).
The Companys operations for the periods presented since the merger are referenced herein as the
successor operations (the Successor or Successor Operations) and include the effects of the
Companys debt refinancing. Periods prior to the acquisition by Allied Capital are referred to
below as the pre-predecessor operations (the Pre-predecessor or Pre-predecessor Operations). The following table sets forth selected consolidated financial data of the Pre-predecessor as of
and for the year ended December 31, 2000 and the nine months ended September 30, 2001; and
consolidated financial data of the Predecessor as of and for the three months ended March 31, 2004,
the two years ended December 31, 2003 and the three months ended December 31, 2001; and
consolidated financial data of the Successor as of and for the nine months ended December 31, 2004.
See the accompanying Notes to Consolidated Financial Statements and Item 7 - Managements
Discussion and Analysis of Financial Condition and Results of Operations for information regarding
the acquisition of the Company by CHS and the Companys debt refinancing as well as other
acquisitions that affect comparability. (dollars in thousands)Successor
    
    
    
    Predecessor
    
    
    
    Pre-predecessor (3)ThreeNine Months
    
    
    
    Three
    
    
    
    
    
    
    
    
    
    
    Months
    
    
    
    Nine MonthsEnded
    
    
    
    Months Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Ended
    
    
    
    Ended
    
    
    Year Ended12/31/04
    
    

    03/31/04


    12/31/03



12/31/02



12/31/01

    

    09/30/01


    12/31/00Income Statement Data:Continuing OperationsNet sales
    
    $
    272,640
    
    
    
    $
    78,997
    
    
    $
    318,441
    
    
    $
    286,788
    
    
    $
    60,040
    
    
    
    $
    341,307
    
    
    $
    462,839Gross profit
    
    
    149,922
    
    
    
    
    43,217
    
    
    
    174,671
    
    
    
    160,614
    
    
    
    34,442
    
    
    
    
    143,564
    
    
    
    184,660Non-recurring expense (2)
    
    
    
    
    
    
    
    30,707
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on contribution of
subsidiaries (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,115Income (loss) before
discontinued operations (4)
    
    
    627
    
    
    
    
    (19,316
    )
    
    
    (4,647
    )
    
    
    6,103
    
    
    
    (2,909
    )
    
    
    
    (1,327
    )
    
    
    27,290(Loss) income from discontinued
operations (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,610
    )Net income (loss)
    
    $
    627
    
    
    
    $
    (19,316
    )
    
    $
    (4,647
    )
    
    $
    6,103
    
    
    $
    (2,909
    )
    
    
    $
    (1,327
    )
    
    $
    24,680Balance Sheet Data at December 31:Total assets
    
    $
    606,542
    
    
    
    
    N/A
    
    
    $
    355,833
    
    
    $
    363,194
    
    
    $
    339,961
    
    
    
    
    N/A
    
    
    $
    320,960Long-term debt and capitalized
lease obligations (1)
    
    $
    264,101
    
    
    
    
    N/A
    
    
    $
    148,309
    
    
    $
    146,716
    
    
    $
    128,739
    
    
    
    
    N/A
    
    
    $
    102,790
   (1)
    
    Includes current portion of long-term debt and capitalized lease obligations.(2)
    
    Non-recurring expenses incurred in connection with CHS merger including $24,353 for
stock options granted at an exercise price below fair market value, $4,035 in investment
banking and legal fees, $1,922 in management bonuses and $397 in payroll taxes. See the
Notes to the Consolidated Financial Statements for further details.(3)
    
    Financial data for the nine months ended September 30, 2001 and the year ended December
31, 2000 include the operating results of the SunSource Technology Services business, the
assets of which were sold pursuant to an Asset Purchase Agreement on September 28, 2001.(4)
    
    This information is not included in the current Consolidated Statements of Operations
for the three years ended December 31, 2004, however, it was included in prior years when
applicable. 12




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##### 



Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations. The following discussion provides information which management believes is relevant to an
assessment and understanding of the Companys operations and financial condition. This discussion
should be read in conjunction with the consolidated financial statements and related notes and
schedules thereto appearing elsewhere herein. General The Hillman Companies, Inc. (Hillman or the Company) is one of the largest providers of
hardware-related products and related merchandising services to the retail markets in North
America. The Companys principal business is operated through its wholly-owned subsidiary, The Hillman
Group, which had sales of approximately $352 million in 2004. The Hillman Group sells its product
lines and provides its services to hardware stores, home centers, mass merchants, pet supply
stores, and other retail outlets principally in the United States, Canada, Mexico and South
America. Product lines include thousands of small parts such as fasteners and related hardware
items; keys, key duplication systems and accessories; and identification items, such as, tags and
letters, numbers, and signs. Services offered include design and installation of merchandising
systems and maintenance of appropriate in-store inventory levels. Merger Transaction On March 31, 2004, The Hillman Companies, Inc. was acquired by an affiliate of Code Hennessy &
Simmons LLC (CHS). Pursuant to the terms and conditions of an Agreement and Plan of Merger
(Merger Agreement) dated as of February 14, 2004, the Company was merged with an affiliate of CHS
with the Company surviving the merger (Merger Transaction). The total consideration paid in the
Merger Transaction was $511.6 million including repayment of outstanding debt and including the
value of the Companys outstanding Trust Preferred Securities ($102.4 million at merger). Prior to the merger, Allied Capital Corporation (Allied Capital) owned 96.8 % of the Companys
common stock. As a result of the change of control, an affiliate of CHS owns 49.1% of the
Companys common stock and 54.5% of the Companys voting common stock, Ontario Teachers Pension
Plan (OTPP) owns 27.9% of the Companys common stock and 31.0% of the Companys voting common
stock and HarbourVest Partners VI owns 8.7% of the Companys common stock and 9.7% of the Companys
voting common stock. Certain members of management own 14.1% of the Companys common stock and
4.5% of the Companys voting common stock. CHS is a private equity firm that manages approximately $1.56 billion in capital in four funds.
The acquisition of the Company by CHS adds to their existing portfolio of middle market
manufacturing and distribution businesses. The Companys operations for the periods presented prior to the March 31, 2004 Merger Transaction
are referenced herein as the predecessor financial statements (the Predecessor or Predecessor
Financial Statements). The Companys Consolidated Balance Sheet as of December 31, 2004 and its
related Consolidated Statements of Operations for the nine months ended December 31, 2004, and its
Consolidated Statements of Cash Flows and Changes in Stockholders Equity for the nine months ended
December 31, 2004 are referenced herein as the successor financial statements (the Successor or
Successor Financial Statements). Financing Arrangements On March 31, 2004, the Company, through its Hillman Group subsidiary, refinanced its revolving
credit and senior term loans with a Senior Credit Agreement (the Senior Credit Agreement)
consisting of a $40.0 million revolving credit (the Revolver) and a $217.5 million term loan (the
Term Loan). The Senior Credit Agreement has a seven-year term and 13




---



##### 



provides borrowings at interest rates based on the London Interbank Offered Rates (the LIBOR) plus a margin of between 2.25% and
3.00% (the LIBOR Margin), or prime (the Base Rate) plus a margin of between 1.25% and 2.0% (the Base Rate Margin). The applicable
LIBOR Margin and Base Rate Margin is based on the Companys leverage as of the last day of the
preceding fiscal quarter. In accordance with the Senior Credit Agreement, letter of credit
commitment fees are based on the average daily face amount of each outstanding letter of credit
multiplied by a letter of credit margin of between 2.25% and 3.00% per annum (the Letter of Credit
Margin). The Letter of Credit Margin is also based on the Companys leverage at the date of the
preceding fiscal quarter. The Company also pays a commitment fee of 0.50% per annum on the average
daily unused Revolver balance. In addition, on March 31, 2004, the Company, through The Hillman Group, issued $47.5 million of
unsecured subordinated notes to Allied Capital maturing on September 30, 2011 (Subordinated Debt
Issuance). Interest on the Subordinated Debt Issuance is at a fixed rate of 13.5% per annum, with
cash interest payments required on a quarterly basis at a fixed rate of 11.25% commencing April 15,
2004. The outstanding principal balance of the Subordinated Debt Issuance shall be increased on a
quarterly basis at the remaining 2.25% fixed rate (the PIK Amount). All of the PIK Amounts are
due on the maturity date of the Subordinated Debt Issuance. The Company pays interest to the Trust on the Junior Subordinated Debentures underlying the Trust
Preferred Securities at the rate of 11.6% per annum on their face amount of $105.4 million, or
$12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the
holders of the Trust Preferred Securities. On April 28, 2004, the Company entered into an Interest Rate Swap Agreement (Swap) with a
two-year term for a notional amount of $50.0 million. The Swap effectively fixes the interest rate
on $50.0 million of the Term Loan at a rate of 1.17% plus the applicable interest rate margin for
the first three months of the Swap with incremental increases ranging from 28 to 47 basis points in
each successive quarter. Acquisitions and Divestitures On October 3, 2002, the Company, through The Hillman Group, purchased the net assets of the
DIY division (DIY) of the Fastenal Company of Winona, MN (Fastenal). DIY, with annual sales of
approximately $22 million, distributes fasteners, anchors, picture hanging wire, hooks, tacks, and
brads to national hardware cooperatives and home centers. The Company paid $15.3 million in cash
to Fastenal for the net assets of DIY. The transaction was financed from the Companys existing
credit lines. In connection with the DIY acquisition, the Company developed an overall plan that included the
elimination of redundant headcount and facilities. In accordance with ETIF No. 95-3, Recognition
of Liabilities in Connection with a Purchase Business Combination, the Company accrued $3.4
million of estimated costs related to the plan in the fourth quarter of 2002. The estimated costs
consisted of approximately $1.5 million of fixed asset disposals, $0.9 million of facilities lease
costs, $0.5 million of inventory conversion and relocation expense and $0.5 million for planned
workforce reductions. The plan was substantially completed by December 31, 2003. Additional reserves were established in 2003 for costs associated with the integration of the DIY
acquisition. Additional costs include severance of $0.3 million, facility lease of $1.2 million,
inventory adjustments of $0.8 million, and customer conversion costs which include product buybacks
of $1.6 million. The actual cost of fixed asset disposals was $0.4 million less than the original
estimate. On May 1, 2002, the Companys Hillman Group purchased certain assets of the Lowes specialty
fastener business from R&B, Inc. for cash consideration of $6.2 million. The purchase of the
specialty fastener business has expanded the breadth of the Companys product offering to Lowes.
In connection with this transaction, the Company settled litigation filed by R&B, Inc. in February
1996 related to the Companys sale of the Dorman Products division. 14




---



##### 



The litigation settlement in the amount of $1.25 million was fully reserved on the Companys balance sheet, and accordingly,
there was no charge to income in 2002. On March 2, 2000, the Company contributed the interests in its Kar Products, Inc. and A & H Bolt &
Nut Company Limited operations (collectively, the Kar business), to a newly-formed partnership affiliated with Glencoe Capital, L.L.C. (Glencoe). Glencoe contributed cash equity
to the new partnership, GC-Sun Holdings L.P. (G-C). The Company received $105 million in cash
proceeds from the transaction through repayment of assumed debt by G-C and retained minority
ownership in G-C. Affiliates of Glencoe held the controlling interest in G-C. The Company
recorded a pre-tax gain on the transaction of approximately $49.1 million in the first quarter of
2000. On January 4, 2002, G-C provided the Company notice that it intended to exercise its call
right to purchase the Companys partnership interest as a result of the merger transaction with
Allied Capital. On April 13, 2002, the Company entered into a Unit Repurchase Agreement with G-C,
pursuant to which G-C exercised its call right. In exchange for its interest in G-C, the Company
received a $10 million subordinated note from G-C. In February 2003, G-C sold the assets of its largest operating division, Kar Products. The proceeds
of the sale were primarily used to pay down G-Cs senior creditors. Following the sale of Kar
Products, the Company estimated the enterprise value of G-C based on the cash flows and book value
of the remaining operating division under a held for sale methodology. The excess of the estimated
enterprise value less debt obligations senior to the G-C note were determined to be insufficient to
support the value of the G-C note and accrued interest thereon. Accordingly, the Company recorded
a $11.3 million charge to income during the year ended December 31, 2003 to write-down the face
value of the note and accrued interest thereon to zero. The G-C note was distributed to the Companys common stockholders on March 31, 2004. 15




---



##### 



Results of Operations Sales and Profitability for each of the Three Years Ended December 31 (dollars in thousands)2004 (a)
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    TotalNet sales
    
    $
    351,637
    
    
    
    100.0
    %
    
    $
    318,441
    
    
    
    100.0
    %
    
    $
    286,788
    
    
    
    100.0
    %Cost of sales
    
    
    158,498
    
    
    
    45.1
    %
    
    
    143,770
    
    
    
    45.1
    %
    
    
    126,174
    
    
    
    44.0
    %Gross profit
    
    
    193,139
    
    
    
    54.9
    %
    
    
    174,671
    
    
    
    54.9
    %
    
    
    160,614
    
    
    
    56.0
    %Operating expenses:Selling
    
    
    67,796
    
    
    
    19.3
    %
    
    
    57,939
    
    
    
    18.2
    %
    
    
    54,872
    
    
    
    19.1
    %Warehouse & delivery
    
    
    44,245
    
    
    
    12.6
    %
    
    
    40,590
    
    
    
    12.7
    %
    
    
    33,048
    
    
    
    11.5
    %General & Administrative
    
    
    18,054
    
    
    
    5.1
    %
    
    
    21,922
    
    
    
    6.9
    %
    
    
    23,516
    
    
    
    8.2
    %Stock compensation expense
    
    
    272
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Total SG&A
    
    
    130,367
    
    
    
    37.1
    %
    
    
    120,451
    
    
    
    37.8
    %
    
    
    111,436
    
    
    
    38.9
    %Non-recurring expense (b)
    
    
    30,707
    
    
    
    8.7
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Depreciation
    
    
    15,187
    
    
    
    4.3
    %
    
    
    14,399
    
    
    
    4.5
    %
    
    
    12,004
    
    
    
    4.2
    %Amortization
    
    
    5,748
    
    
    
    1.6
    %
    
    
    1,437
    
    
    
    0.5
    %
    
    
    1,485
    
    
    
    0.5
    %Management fees
    
    
    1,329
    
    
    
    0.4
    %
    
    
    1,800
    
    
    
    0.6
    %
    
    
    1,800
    
    
    
    0.6
    %Total operating expenses
    
    
    183,338
    
    
    
    52.1
    %
    
    
    138,087
    
    
    
    43.4
    %
    
    
    126,725
    
    
    
    44.2
    %Gain on termination of defined
benefit pension plan (c)
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    1,231
    
    
    
    0.4
    %Other income (expense)
    
    
    277
    
    
    
    0.1
    %
    
    
    681
    
    
    
    0.2
    %
    
    
    320
    
    
    
    0.1
    %Income from operations
    
    
    10,078
    
    
    
    2.9
    %
    
    
    37,265
    
    
    
    11.7
    %
    
    
    35,440
    
    
    
    12.4
    %Interest expense
    
    
    17,539
    
    
    
    5.0
    %
    
    
    15,405
    
    
    
    4.8
    %
    
    
    13,227
    
    
    
    4.6
    %Interest expense on mandatorily
redeemable preferred stock &
management purchased preferred
options
    
    
    5,458
    
    
    
    1.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Interest expense on junior
subordinated notes
    
    
    12,231
    
    
    
    3.5
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Distributions on guaranteed
preferred beneficial interest
    
    
    
    
    
    
    0.0
    %
    
    
    12,231
    
    
    
    3.8
    %
    
    
    12,231
    
    
    
    4.3
    %Write-down of note receivable
    
    
    
    
    
    
    0.0
    %
    
    
    11,258
    
    
    
    3.5
    %
    
    
    
    
    
    
    0.0
    %Income (loss) before taxes
    
    
    (25,150
    )
    
    
    -7.2
    %
    
    
    (1,629
    )
    
    
    -0.5
    %
    
    
    9,982
    
    
    
    3.5
    %
   (a)
    
    For the purpose of comparing the Companys results of operations for each of the three
years ended December 31, 2004, the results of the Predecessor Operations for the three months
ended March 31, 2004 have been combined with the results of the Successor Operations for the
nine months ended December 31, 2004.(b)
    
    Represents one-time charges for stock options, management bonuses, investment banking, and
legal fees incurred in connection with the March 31, 2004 Merger Transaction.(c)
    
    Represents income as a result of the final settlement of the Companys defined benefit plans
in 2002. 16




---



##### 



Years Ended December 31, 2004 and 2003 Net sales increased $33.2 million or 10.4% in 2004 to $351.6 million from $318.4 million in 2003.
Sales to national accounts represented $19.2 million of the $33.2 million total sales increase.
The new store growth of our national accounts customers was primarily responsible for the increased
fastener, keys, and LNS sales to Lowes, increased keys and LNS sales to Home Depot, and increased
keys sales to Wal-Mart. Sales to Franchise and Independent (F&I) accounts increased $9.1 million
from 2003 primarily due to improved economic activity at the retail level and increased sales of
galvanized fasteners used in the newly formulated treated lumber. The F&I accounts are typically
individual hardware dealers who are members of larger cooperatives, such as Tru-Serv, Ace, and
Do-It-Best. In addition, the regional and engraving accounts increased $3.2 million over the
comparable period in 2003. The regional accounts represent mid-sized hardware and lumber chains.
Sales by our Canadian division increased $1.3 million, export sales increased $0.8 million, and
other sales were $0.4 million less than the prior year. The Companys sales backlog, based upon cancelable purchase orders, was $3.1 million as of December
31, 2004 and $2.6 million as of December 31, 2003. The Hillman Groups gross margin of 54.9% in 2004 was unchanged from 2003. Price increases
together with production efficiencies following the December 2003 consolidation of the Rockford
packaging and distribution facility into the Companys Cincinnati facility offset the rising cost
of the Companys products. The Companys consolidated Selling, General and Administrative (S,G&A) expenses increased $9.9
million or 8.2% from $120.5 million in 2003 to $130.4 million in 2004. Selling expenses increased
$9.9 million or 17.1% primarily as a result of increased servicing and display costs at new
national account stores. Warehouse and delivery expenses increased $3.6 million or 8.9% as a
result of increased freight and labor costs of $2.8 million to process and ship the additional
sales volume. General and administrative expenses decreased by $3.9 million or 17.8% as a result
of a substantial decrease in medical claims experienced in 2004 compared to 2003 which included
$1.5 million in claims by an employee for medical services. In addition, 2004 expense declined
further from 2003 as a result of the elimination of several positions from our corporate office and
Tempe facility together with the December 2003 shutdown of the Rockford facility. Stock
compensation expenses from stock options related to the Merger Transaction were $0.3 million in
2004. There was no stock compensation expense in 2003. Depreciation expense increased $0.8 million to $15.2 million in 2004 from $14.4 million in 2003
primarily as a result of an increase in the depreciable fixed asset base in connection with the
placement of key duplication machines used in new national accounts. Amortization expense increased $4.3 million to $5.7 million in 2004 from $1.4 million in 2003. The
increase in amortization was the result of an increase in the valuation of certain intangible
assets in connection with the Merger Transaction. The Company has recorded a management fee charge of $1.3 million for 2004 and $1.8 million for
2003. The Company is obligated to pay management fees to a subsidiary of CHS for management
services rendered in the amount of fifty-eight thousand dollars per month, plus out of pocket
expenses, and to pay management fees to a subsidiary of OTPP for management services rendered in
the amount of twenty-six thousand dollars per month, plus out of pocket expenses, for each month
commencing with the closing date of the Merger Transaction. The Company was obligated to pay
management fees to a subsidiary of Allied Capital for management services rendered in the amount of
$1.8 million, plus out of pocket expenses, for calendar years subsequent to 2001. The payment of
management fees was due annually after delivery of the Companys annual audited financial
statements to the Board of Directors of the Company. The obligation to pay management fees to
Allied Capital was terminated upon the payment of outstanding fees in the amount of $2.3 million on
March 31, 2004 in connection with the close of the Merger Transaction. 17




---



##### 



Income from operations for the year ended December 31, 2004 was $40.8 million after excluding $30.7
million in non-recurring costs recorded in connection with the Merger
Transaction. This represents an increase of $3.5 million or 9.4% from the $37.3 million for the
year ended December 31, 2003. The Companys consolidated operating profit margin from operations (income from operations as a
percentage of net sales) decreased from 11.7% in 2003 to 11.6% in 2004 after excluding
non-recurring costs recorded in connection with the Merger Transaction. The operating profit
margin benefited from the reduction of S,G&A expenses and management fees as a percentage of sales,
but these benefits were offset by the increase in amortization costs as a percentage of sales which
resulted from the Merger Transaction. Interest expense, net, increased $2.1 million to $17.5 million in 2004 from $15.4 million in 2003.
The increase in interest expense, net, was primarily the result of increased Company debt related
to the Merger Transaction and the amortization of additional deferred financing costs. Interest expense was $5.5 million in 2004 on the mandatorily redeemable preferred stock and
management purchased preferred options related to the Merger Transaction. No such interest expense
was recorded in 2003. The Company also pays interest to the Trust on the Junior Subordinated Debentures underlying the
Trust Preferred Securities at the rate of 11.6% per annum on their face amount of $105.4 million,
or $12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the
holders of the Trust Preferred Securities. For the years ended December 31, 2004 and 2003, the
Company paid $12.2 million interest on the Junior Subordinated Debentures, which is equivalent to
the amounts distributed by the Trust on the Trust Preferred Securities. See Note 6, Income Taxes, of Notes to Consolidated Financial Statements of the Company for the
three years ended December 31, 2004, for income taxes and disclosures related to 2004 and 2003
income tax events. Years Ended December 31, 2003 and 2002 Net sales from the Hillman Group operations increased $31.6 million or 11.0% in 2003 to $318.4
million from $286.8 million in 2002. DIY was acquired from the Fastenal Company in October 2002
and it contributed $12.8 million of the 2003 sales increase. Increased fastener sales to Lowes
represented $4.7 million of the $31.6 million total sales increase in 2003 over 2002. In May 2002,
Hillman began supplying all Lowes locations following the acquisition of the specialty fastener
business from R&B, Inc. Sales to other national accounts, including Home Depot and Wal-Mart,
increased by an aggregate $7.2 million in 2003 compared to 2002, primarily as a result of new store
growth. In addition, the regional and engraving accounts together with F&I accounts increased $5.3
million over the comparable period in 2002. The regional accounts represent mid-sized hardware and
lumber chains. The F&I accounts are typically individual dealers who are members of larger
cooperatives, such as Tru-Serv, Ace, and Do-It-Best. Sales by our Canadian division increased $0.5
million, Export sales increased $0.6 million, and other sales accounted for the remaining $0.5
million in increased sales over 2002. The Companys sales backlog, based upon cancelable purchase orders, was $2.6 million as of December
31, 2003 and $1.3 million as of December 31, 2002. The Hillman Groups gross margin was 54.9% in 2003 compared with 56.0% in 2002. The increase in
sales volume generated from the newly acquired DIY division was made primarily to warehouse
accounts at lower margin rates than other typical Hillman accounts. The resultant shift in sales
mix contributed to the 1.1% decrease in gross margin in the comparison period. The Companys consolidated Selling, General and Administrative expenses increased $9.1 million or
8.2% from $111.4 million in 2002 to $120.5 million in 2003. Selling expenses increased $3.1
million or 5.5% primarily as a result of servicing costs at new national account stores. Warehouse
and delivery expenses increased $7.6 million or 23.0% as a result 18




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##### 



of increased freight and labor costs to process and ship the additional sales volume. General and administrative expenses
decreased by $1.6 million or 6.8% primarily as a result of the closing of the Philadelphia
corporate office in May 2002 and moving the corporate operations to Cincinnati. Depreciation expense from operations increased $2.4 million to $14.4 million in 2003 from $12.0
million in 2002 primarily as a result of an increase in the depreciable fixed asset base in
connection with the purchase of automation equipment for the Cincinnati distribution center. Amortization expense from operations decreased $0.1 million to $1.4 million in 2003 from $1.5
million in 2002. The decrease in amortization was the result of certain intangible assets becoming
fully amortized during 2003. The Company has recorded a management fee charge of $1.8 million in both the years 2003 and 2002.
In connection with the merger transaction with Allied Capital, the Company was obligated to pay
management fees to a subsidiary of Allied Capital for management services rendered in the amount of
$1.8 million for calendar years subsequent to 2001. The payment of management fees was due
annually after delivery of the Companys annual audited financial statements to the Board of
Directors of the Company. Income from operations for the year ended December 31, 2003 was $37.3 million. This represents an
increase of $3.1 million or 9.1% from the $34.2 million for the year ended December 31, 2002 after
excluding a one-time gain of $1.2 million on termination of the pension plan. The Companys consolidated operating profit margin from operations (income from operations as a
percentage of net sales) decreased to 11.7% in 2003 from 12.0% after excluding a one-time gain on
termination of the pension plan in 2002. The operating profit margin decreased as a result of
lower gross profit on the change in sales mix discussed above and the increase in depreciation
expense which resulted from the larger depreciable fixed asset base. The operating profit margin
benefited from the reduction of S,G&A expenses as a percentage of sales. Interest expense, net, increased $2.2 million to $15.4 million in 2003 from $13.2 million in 2002.
The increase in interest expense, net of interest income, was primarily the result of a decrease in
interest income recorded on the $10.0 million note received from Glencoe from sale of the Companys
interest in GC-Sun Holdings L.P. The Company recorded no interest income in 2003 as compared to
$1.3 million in 2002. The remaining increase in interest expense was primarily the result of
additional borrowings to finance the expansion and automation of the Companys distribution
facility, to purchase the Lowes specialty fastener business from R&B, Inc., and to purchase the
DIY division of Fastenal Company. The Company pays interest to the Trust on the Junior Subordinated Debentures underlying the Trust
Preferred Securities at the rate of 11.6% per annum on their face amount of $105.4 million, or
$12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the
holders of the Trust Preferred Securities. For the years ended December 31, 2003 and 2002, the
Company paid $12.2 million interest on the Junior Subordinated Debentures, equivalent to the
amounts distributed by the Trust on the Trust Preferred Securities. See Note 6, Income Taxes, of Notes to Consolidated Financial Statements of the Company for the
three years ended December 31, 2004, for income taxes and disclosures related to 2003 and 2002
income tax events. Liquidity and Capital Resources Net cash provided by
operating activities for the year ended December 31, 2004 was
$5.3
million, primarily due to cash related adjustments of $5.9 million for routine operating activities
represented by changes in inventories, accounts receivable, accounts
payable, and other assets plus
the net income adjusted for non-cash charges for depreciation, amortization, dispositions of
equipment, deferred taxes, PIK interest, and interest on mandatorily redeemable preferred stock of
$0.5 million less prepayment penalty of $1.1 million. 19




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##### 



Net cash used for investing activities was $12.0 million for the year ended December 31, 2004.
Capital expenditures for the year totaled $12.0 million, consisting of $5.7 million for key
duplicating machines, $2.0 million for engraving machines and $4.3 million for equipment purchases. Net cash provided by financing activities for the year ended December 31,
2004 was $38.2 million,
primarily related to the assumption of additional debt in connection with the Merger Transaction. The Companys working capital (current assets minus current liabilities) position of $88.7 million
as of December 31, 2004, represents an increase of $33.1 million from the December 31, 2003 level
of $55.6 million as follows: (dollars in thousands) AmountIncrease in cash and cash equivalents
    
    $
    31,504Increase in accounts receivable, net
    
    
    4,520Decrease in inventories, net
    
    
    (145
    )Decrease in other current assets
    
    
    (2,950
    )Increase in deferred taxes
    
    
    1,237Increase in accounts payable
    
    
    (7,531
    )Decrease in current portion of senior term loam
    
    
    7,093Increase in accrued interest
    
    
    (2,105
    )Decrease in other accrued liabilities
    
    
    2,940Other items, net
    
    
    (1,453
    )Net increase in working capital for the year ended December 31, 2004
    
    $
    33,110
 The Companys contractual obligations in thousands of dollars as of December 31, 2004 are
summarized below: Payments DueContractual Obligations
    
    Total
    
    
    Less Than One Year
    
    
    1 to 3 Years
    
    
    3 to 5 Years
    
    
    More Than Five YearsJunior Subordinated Debentures (1)
    
    $
    114,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    114,429Long Term Senior Term Loans
    
    
    213,694
    
    
    $
    2,175
    
    
    $
    4,350
    
    
    $
    4,350
    
    
    
    202,819Long Term Unsecured Subordinated Notes
    
    
    48,090
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,090Operating Leases
    
    
    31,670
    
    
    
    6,793
    
    
    
    8,021
    
    
    
    5,017
    
    
    
    11,839Mandatorily Redeemable Preferred Stock
    
    
    62,232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,232Management Purchased Preferred Options
    
    
    3,577
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,577Deferred Compensation Obligations
    
    
    4,223
    
    
    
    75
    
    
    
    150
    
    
    
    150
    
    
    
    3,848Capital Lease Obligations
    
    
    142
    
    
    
    43
    
    
    
    82
    
    
    
    17
    
    
    
    Other Long Term Obligations
    
    
    5,547
    
    
    
    1,485
    
    
    
    950
    
    
    
    793
    
    
    
    2,319Total Contractual Cash Obligations
    
    $
    483,604
    
    
    $
    10,571
    
    
    $
    13,553
    
    
    $
    10,327
    
    
    $
    449,153
   (1)
    
    The junior subordinated debentures liquidation value is approximately $105,446. All of the obligations noted above are reflected on the Companys Consolidated Balance Sheet
as of December 31, 2004, except for the Operating Leases. See Notes To Consolidated Financial
Statements as of and for the three years ended December 31, 2004 for additional information. The Company does not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K under the Securities Exchange Act of 1934, as amended. As of December 31, 2004, the Company had $34.5 million available under its secured credit
facilities. The Company had approximately $216.0 million of outstanding debt under its secured
credit facilities at December 31, 2004, consisting of $215.9 million in a term loan and $0.1
million in capitalized lease obligations. The term loan consisted of a $215.3 million Term B Loan
currently at a six (6) month LIBOR rate of 5.50% and a $0.6 million Term B Loan currently at a
three (3) month LIBOR rate of 5.8125%. The capitalized lease obligations were at various interest
rates. 20




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##### 



As of December 31, 2004, the Company had purchase commitments which totaled $1.25 million for
the expansions of the Cincinnati and Tempe office locations. The Company had no other material
purchase commitments for capital expenditures. Interest on the Subordinated Debt Issuance of $47.5 million which matures September 30, 2011 is at
a fixed rate of 13.5% per annum, with cash interest payments being required on a quarterly basis at
a fixed rate of 11.25% commencing April 15, 2004. The outstanding principal balance of the
Subordinated Debt Issuance shall be increased on a quarterly basis by the remaining 2.25% PIK
Amount. All of the PIK Amounts are due on the maturity date of the Subordinated Debt Issuance. As
of December 31, 2004, the outstanding Subordinated Debt Issuance including the PIK Amounts was
$48.1 million. In accordance with the Companys Senior Credit Agreement, Hillman must maintain its fixed charge
coverage at all times in excess of 1.10x through December 31, 2004, 1.05x from January 1, 2005
through December 31, 2005 and 1.15x thereafter to continue monthly distributions on its Trust
Preferred Securities ($1.0 million per month). Hillmans fixed charge coverage was 1.44x for the
twelve-month period ended December 31, 2004 as calculated in accordance with the Senior Credit
Agreement. The Company had deferred tax assets aggregating $47.4 million, net of valuation allowance of $14.0
million, and deferred tax liabilities of $51.6 million as of December 31, 2004, as determined in
accordance with SFAS 109. Management believes that the Companys deferred tax assets will be
realized through the reversal of existing temporary differences between the financial statement and
tax basis, as well as through future taxable income. Inflation The Company is sensitive to inflation present in the economies of the United States and our
foreign suppliers located primarily in Taiwan and China. Inflation in recent years has produced
only a modest impact on the Companys operations, however, the recent growth in Chinas economic
activity has increased overall demand for materials used in the manufacture of our products. This
increased demand has produced cost increases for certain of our fastener products which exceed the
prevailing rate of inflation. Continued inflation and resulting cost increases over a period of
years would result in significant increases in inventory costs and operating expenses. However,
such higher cost of sales and operating expenses can generally be offset by increases in selling
prices, although the ability of the Companys operating divisions to raise prices is dependent on
competitive market conditions. Related Party Transactions On September 26, 2001, the Company was acquired by Allied Capital pursuant to the terms and
conditions of an Agreement and Plan of Merger dated as of June 18, 2001. In connection with this
Agreement and Plan of Merger, the Company was obligated to pay management fees to a subsidiary of
Allied Capital for management services rendered in the amount of $1.8 million per year, plus out of
pocket expenses, for calendar years subsequent to 2001. The Company has recorded a management fee
charge of $0.5 million, $1.8 million and $1.8 million on the Predecessors Statement of Operations
for the three months ended March 31, 2004 and the years ended December 31, 2003 and 2002,
respectively. Payment of management fees was due annually after delivery of the Companys annual
audited financial statements to the Board of Directors of the Company. The management fee for the
year ended December 31, 2002 was paid in March 2003 and the management fee for the three months
ended December 31, 2001 was paid in March 2002. The obligation to pay management fees to Allied
Capital was terminated upon the payment of outstanding fees in the amount of $2.3 million on March
31, 2004 in connection with the close of the Merger Transaction. On March 31, 2004, the Company was acquired by an affiliate of CHS. In connection with the CHS
acquisition, the Company is obligated to pay management fees to a subsidiary of CHS in the amount
of $58 thousand per month and to pay management fees to a subsidiary of OTPP in the amount of $26
thousand per month, plus out of pocket expenses, for each month 21




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##### 



commencing with the closing date of the Merger Transaction. The Company has recorded management fee
charges and expenses from CHS and OTPP of $0.8 million for the nine month period ended December 31,
2004. The Predecessor Company incurred interest expense to Allied Capital on the unsecured subordinated
note at a fixed rate of 18.0% per annum. Cash interest payments were required on a quarterly basis
at a fixed rate of 13.5% with the remaining 4.5% fixed rate (the PIK Amount) being added to the
principal balance. The subordinated debt and accrued interest thereon of $45,571 were paid in full
at March 31, 2004 in connection with the Merger Transaction. See discussion above and in Note 9,
Long-Term Debt, of Notes to Consolidated Financial Statements. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions about future events that affect
the amounts reported in the financial statements and accompanying notes. Future events and their
effects cannot be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results may differ from those estimates, and such
differences may be material to the Companys consolidated financial statements and results of
operations. The most significant accounting estimates inherent in the preparation of the Companys consolidated
financial statements include estimates associated with its evaluation of the recoverability of
goodwill as well as those used in the determination of liabilities related to insurance programs,
litigation, and taxation. The Companys purchase price allocation methodology requires estimates of
the fair value of assets acquired and liabilities assumed. In addition, significant estimates form
the basis for the Companys reserves with respect to sales and returns allowances, collectibility
of accounts receivable, inventory valuations, deferred tax assets, and certain benefits provided to
current employees. Various assumptions and other factors underlie the determination of these
significant estimates. The process of determining significant estimates is fact specific and takes
into account factors such as historical experience, current and expected economic conditions and
product mix. The Company re-evaluates these significant factors and makes adjustments where facts
and circumstances dictate. Specific factors are as follows: recoverability of goodwill and
intangible assets are subject to annual impairment testing; purchase price allocation adjustments
are based on changes in settlements of liabilities and assets realized; litigation is based on
projections provided by legal counsel; deferred taxes are based on the Companys projections of
future taxable income; sales and returns and allowances are based on historical activity and
customer contracts; accounts receivable reserves are based on doubtful accounts and aging of
outstanding balances; inventory reserves are based on expected obsolescence and excess inventory
levels; and employee benefits are based on benefit plan requirements and severance agreements.
Historically, actual results have not significantly deviated from those determined using the
estimates described above. Revenue Recognition: Revenue from sales of products is recorded upon the passing of title and risks of ownership to the
customer, which occurs upon the shipment of goods. The Company offers a variety of sales incentives to its customers primarily in the form of
discounts, rebates and slotting fees. Discounts are recognized in the financial statements at the
date of the related sale. Rebates are estimated based on the anticipated rebate to be paid and a
portion of the estimated cost of the rebate is allocated to each underlying sales transaction.
Slotting fees are used on an infrequent basis and are not considered to be significant. Discounts,
rebates and slotting fees are included in the determination of net sales. The Company also establishes reserves for customer returns and allowances. The reserve is
established based on historical rates of returns and allowances. The reserve is adjusted quarterly
based on actual experience. 22




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##### 



Accounts Receivable and Allowance for Doubtful Accounts: The Company establishes the allowance for doubtful accounts using the specific identification
method and also provides a reserve in the aggregate. The estimates for calculating the aggregate
reserve are based on historical information. The allowance for doubtful accounts was $526 and $524
as of December 31, 2004 and 2003, respectively. Inventory Realization: Inventories consisting predominantly of finished goods are valued at the lower of cost or market,
cost being determined principally on the first-in, first-out method. Excess and obsolete
inventories are carried at net realizable value. The historical usage rate is the primary factor
used by the Company in assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is recorded in an
inventory reserve for inventory with no usage in the preceding twenty-four month period or with on
hand quantities in excess of twenty-four months average usage. The inventory reserve amounts were
$3,558 and $3,189 at December 31, 2004 and 2003, respectively. Property and Equipment: Property and equipment, including assets acquired under capital leases, are carried at cost and
include expenditures for new facilities and major renewals. Maintenance and repairs are charged to
expense as incurred. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from their respective accounts, and the resulting gain or loss
is reflected in income from operations. Depreciation: For financial accounting purposes, depreciation, including that related to plant and equipment
acquired under capital leases, is computed on the straight-lined method over the estimated useful
lives of the assets, generally three to ten years, or over the terms of the related leases. Goodwill and Other Intangible Assets: The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and accordingly, goodwill
is no longer amortized, but is reviewed annually for impairment. Other intangible assets arising
principally from the Merger Transaction are amortized on a straight-line basis over periods ranging
from four to twenty-three years except the trademarks which are not amortized due to their
indefinite useful lives. Long-Lived Assets: Under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company has evaluated its long-lived assets for financial impairment and will continue
to evaluate them based on the estimated undiscounted future cash flows as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully recoverable. Income Taxes: Deferred income taxes are computed using the asset and liability method. Under this method,
deferred income tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities (temporary differences) and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are provided for tax benefits where it is more likely than not that certain
tax benefits will not be realized. Adjustments to valuation allowances are recorded from changes in
utilization of the tax related item. 23




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##### 



Self-insurance Reserves: The Company self insures its product liability, workers compensation and general liability losses
up to $250 thousand per occurrence. Catastrophic coverage is maintained for occurrences in excess
of $250 thousand up to $35 million. The Company self insures its group health claims up to an annual stop loss limit of $125 thousand
per participant. Aggregate coverage is maintained for annual group health insurance claims in
excess of 125% of expected claims. Provisions for losses expected under these programs are recorded based on an analysis of historical
insurance claim data and certain actuarial assumptions. Retirement Benefits: Certain employees of the Company are covered under a profit-sharing and retirement savings plan
(defined contribution plan). See Note 15, Retirement Benefits, of Notes to Consolidated Financial
Statements for additional information. Shipping and Handling: The costs incurred to ship
product to customers, including freight and handling expenses, are
included in selling, general and administrative expenses on the
Companys Statements of Operations. The Predecessor
Companys shipping and handling costs were $3,629, $15,916, and
$13,913 for the three months ended March 31, 2004 and the years ended
December 31, 2003 and 2002, respectively. The Successor
Companys shipping and handling costs were $12,790 for the nine
months ended December 31, 2004. Research and Development: The Company incurs research
and development costs consisting primarily of internal wages and
benefits in connection with improvements to the key duplicating and
engraving machines. The Predecessor Companys research and
development costs were $277, $1,381, and $1,510 for the three months
ended March 31, 2004 and the years ended December 31, 2003 and 2002,
respectively. The Successor Companys research and development
costs were $796 for the nine months ended December 31, 2004. Stock Based Compensation: The Company applies the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations in accounting
for its stock based employee compensation plans. The Company is also subject to disclosure
requirements of SFAS 123, Accounting for Stock Based Compensation (SFAS 123).
Stock compensation expense as recorded under the APB 25 intrinsic
value method approximates the fair value model prescribed by SFAS
123; accordingly no pro forma disclosures are necessary under SFAS
123.
See Note 14, Stock Based
Compensation, of Notes to Consolidated Financial Statements for additional information. Fair Value of Financial Instruments: Cash, accounts receivable, short-term borrowings, accounts payable, accrued liabilities and bank
revolving credit are reflected in the consolidated financial statements at fair value due to
short-term maturity or revolving nature of these instruments. Translation of Foreign Currencies: The translation of the Companys Canadian foreign currency based financial statements into U.S.
dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet
date and for revenue and expense accounts using an average exchange rate during the period. The
exchange rates represent the noon buying rates reported by the Federal Reserve Bank of New York. 24




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##### 



Comprehensive Income (Loss): The components of comprehensive income (loss) were as follows: Successor
    
    
    Predecessor
    
    
    Predecessor
    
    
    PredecessorNine months
    
    
    Three months
    
    
    Year
    
    
    Yearended
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2004
    
    
    2003
    
    
    2002Net income (loss)
    
    $
    627
    
    
    $
    (19,316
    )
    
    $
    (4,647
    )
    
    $
    6,103Change in derivative security value, net
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment, net
    
    
    (110
    )
    
    
    10
    
    
    
    (135
    )
    
    
    5Comprehensive income (loss)
    
    $
    499
    
    
    $
    (19,306
    )
    
    $
    (4,782
    )
    
    $
    6,108
 Use of Estimate in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Please reference Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated
Financial Statements for additional information. Recent Accounting Pronouncements: In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 151, Inventory Costs (SFAS 151). SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and spoilage. This statement requires that these items be expensed
as incurred and not included in overhead. In addition, SFAS 151 requires that allocation of fixed
production overhead to conversion costs should be based on normal capacity of the production
facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company is currently evaluating the impact from this standard on its results of
operations and financial position. In December 2003, the Financial Accounting Standards Board issued Statement No. 123(R),
Share-Based Payment (SFAS 123(R)). This statement replaced Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) will require compensation
costs related to share-based payment transactions to be recognized in the financial statements
(with limited exceptions). The amount of compensation cost will be measured based on the grant-date
fair value of the equity or liability instruments issued. Compensation cost will be recognized over
the period that an employee provides service in exchange for the award. This statement is effective
as of the beginning of the first interim or annual reporting period that begins after June 15,
2005. The Company is currently evaluating the impact from this standard on its results of
operations and financial position. 25




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##### 



Forward Looking Statements Certain disclosures related to acquisitions and divestitures, refinancing, capital
expenditures, resolution of pending litigation and realization of deferred tax assets contained in
this annual report involve substantial risks and uncertainties and may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some
cases, you can identify forward-looking statements by terminology such as may, will, should,
could, would, expect, plan, anticipate, believe, estimate, continue, project or
the negative of such terms or other similar expressions. These forward-looking statements are not historical facts, but rather are based on managements
current expectations, assumptions and projections about future events. Although management believes
that the expectations, assumptions and projections on which these forward-looking statements are
based are reasonable, they nonetheless could prove to be inaccurate, and as a result, the
forward-looking statements based on those expectations, assumptions and projections also could be
inaccurate. Forward-looking statements are not guarantees of future performance . Instead,
forward-looking statements are subject to known and unknown risks, uncertainties and assumptions
that may cause the Companys strategy, planning, actual results, levels of activity, performance,
or achievements to be materially different from any strategy, planning, future results, levels of
activity, performance, or achievements expressed or implied by such forward-looking statements.
Actual results could differ materially from those currently anticipated as a result of a number of
factors, including the risks and uncertainties discussed under captions Risk Factors set forth in
Item 1 of this annual report. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward-looking statements. All forward-looking statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the cautionary statements included in this annual report;
they should not be regarded as a representation by the Company or any other individual. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this annual report might not occur or be
materially different from those discussed. Item 7A  Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to the impact of interest rate changes as borrowings under the Senior
Credit Agreement bear interest at variable interest rates. It is the Companys policy to enter into
interest rate transactions only to the extent considered necessary to meet objectives. On April 28,
2004, the Company entered into an Interest Rate Swap Agreement (Swap) with a two-year term for a
notional amount of $50 million. The Swap fixes the interest rate on $50 million of the Term Loan at
a rate of 1.17% plus the applicable interest rate margin for the first three months of the Swap
with incremental increases ranging from 28 to 47 basis points in each successive quarter. Based on
Hillmans exposure to variable rate borrowings at December 31, 2004, a one percent (1%) change in
the weighted average interest rate for a period of one year would change the annual interest
expense by approximately $1.7 million. The Company is exposed to foreign exchange rate changes of the Canadian currency as it impacts the
$1.6 million net asset value of its Canadian subsidiary, The Hillman Group Canada, Ltd., as of
December 31, 2004. Management considers the Companys exposure to foreign currency translation
gains or losses to be minimal. 26




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##### 



Item 8  Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES Page(s)Report of Independent Registered Public Accounting Firm
    
    28Financial Statements:Consolidated Balance Sheets, December 31, 2004 and 2003
    
    29-30Consolidated Statements of Operations for the Nine Months Ended December 31, 2004, Three Months ended March 31, 2004 and Years
Ended December 31, 2003 and 2002
    
    31Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 2004, Three Months ended March 31, 2004 and Years
Ended December 31, 2003 and 2002
    
    32Consolidated Statements of Changes in Stockholders Equity for
the Nine Months Ended December 31, 2004, Three months
ended March 31, 2004, and Years Ended December 31, 2003 and 2002
    
    33Notes to Consolidated Financial Statements
    
    34-55Financial Statement Schedule:Valuation Accounts
    
    56
 27




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##### 



Report of Independent Registered Public Accounting Firm The Board of Directors and StockholdersThe Hillman Companies, Inc. and Subsidiaries In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of The Hillman Companies, Inc. and its
subsidiaries at December 31, 2004 and 2003 and the results of their operations and their cash flows
for the nine months ended December 31, 2004, the three months ended March 31, 2004 and the years
ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 12, effective January 1, 2004, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 150, Accounting For Certain Financial Instruments with
Characteristics of both Liabilities and Equity and FASB InterpretationNo. 46(R), Consolidation
of Variable interest Entities  an interpretation of ARB No. 51 (revised December 2003). PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 10, 2005 28




---



##### 



Item 1.
    
    THE HILLMAN COMPANIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(dollars in thousands)
 Successor
    
    
    PredecessorDecember 31,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    33,032
    
    
    $
    1,528Restricted investments
    
    
    75
    
    
    
    1,145Accounts receivable, net
    
    
    39,903
    
    
    
    35,383Inventories, net
    
    
    64,627
    
    
    
    64,772Deferred income taxes, net
    
    
    6,520
    
    
    
    5,283Other current assets
    
    
    2,820
    
    
    
    5,770Total current assets
    
    
    146,977
    
    
    
    113,881Property and equipment, net
    
    
    61,111
    
    
    
    64,601Goodwill
    
    
    219,051
    
    
    
    134,725Other intangibles, net
    
    
    167,842
    
    
    
    9,631Deferred income taxes, net
    
    
    
    
    
    
    20,498Restricted investments
    
    
    4,148
    
    
    
    5,932Deferred financing fees, net
    
    
    6,786
    
    
    
    5,638Other assets
    
    
    627
    
    
    
    927Total assets
    
    $
    606,542
    
    
    $
    355,833LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    24,367
    
    
    $
    16,836Current portion of senior term loans
    
    
    2,175
    
    
    
    9,268Current portion of capitalized lease obligations
    
    
    43
    
    
    
    54Accrued expenses:Salaries and wages
    
    
    4,523
    
    
    
    4,897Pricing allowances
    
    
    9,909
    
    
    
    8,242Income and other taxes
    
    
    2,137
    
    
    
    1,966Interest
    
    
    3,362
    
    
    
    1,257Deferred compensation
    
    
    75
    
    
    
    1,145Other accrued expenses
    
    
    11,724
    
    
    
    14,664Total current liabilities
    
    
    58,315
    
    
    
    58,329Long term senior term loans
    
    
    213,694
    
    
    
    51,290Bank revolving credit
    
    
    
    
    
    
    43,495Long term capitalized lease obligations
    
    
    99
    
    
    
    140Long term unsecured subordinated notes
    
    
    48,090
    
    
    
    Long term unsecured subordinated notes to related party
    
    
    
    
    
    
    44,062Junior subordinated debentures
    
    
    114,429
    
    
    
    Mandatorily redeemable preferred stock (Note 13)
    
    
    62,232
    
    
    
    Management purchased preferred options
    
    
    3,577
    
    
    
    Deferred compensation
    
    
    4,148
    
    
    
    5,932Deferred income taxes, net
    
    
    10,730
    
    
    
    Other non-current liabilities
    
    
    9,770
    
    
    
    2,617Total liabilities
    
    
    525,084
    
    
    
    205,865
 29




---



##### 



Item 1.
    
    THE HILLMAN COMPANIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(dollars in thousands)
 Successor
    
    
    PredecessorDecember 31,
    
    
    December 31,2004
    
    
    2003LIABILITIES AND STOCKHOLDERS EQUITY (CONTINUED)Common stock with put options:Class A Common stock, $.01 par, 23,141 shares authorized,
407.6 issued and outstanding at December 31, 2004
    
    
    407
    
    
    
    Class B Common stock, $.01 par, 2,500 shares authorized,
1,000 issued and outstanding at December 31, 2004
    
    
    1,000
    
    
    
    Guaranteed preferred beneficial interests in the
Companys junior subordinated debentures
    
    
    
    
    
    
    102,364Commitments and contingenciesStockholders equity:Preferred Stock:Preferred stock, $.01 par, 1,000,000 shares authorized,
none outstanding at December 31, 2003
    
    
    
    
    
    
    Class A Preferred stock, $.01 par, 238,889 shares authorized,
82,104.8 issued and outstanding at December 31, 2004
    
    
    1
    
    
    
    Common Stock:Common stock, $.01 par, 20,000,000 shares authorized,
7,118,484 issued and outstanding at December 31, 2003
    
    
    
    
    
    
    71Class A Common stock, $.01 par, 23,141 shares authorized,
5,805.3 issued and outstanding at December 31, 2004
    
    
    
    
    
    
    Class C Common stock, $.01 par, 30,109 shares authorized,
2,787.1 issued and outstanding at December 31, 2004
    
    
    
    
    
    
    Additional paid-in capital
    
    
    81,452
    
    
    
    52,310Accumulated deficit
    
    
    (1,274
    )
    
    
    (4,647
    )Accumulated other comprehensive loss
    
    
    (128
    )
    
    
    (130
    )Total stockholders equity
    
    
    80,051
    
    
    
    47,604Total liabilities and stockholders equity
    
    $
    606,542
    
    
    $
    355,833
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
 (dollars in thousands)
 Successor
    
    
    
    PredecessorNine months
    
    
    
    Three months
    
    
    Year
    
    
    Yearended
    
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    
    March 31
    
    
    December 31,
    
    
    December 31,2004
    
    
    
    2004
    
    
    2003
    
    
    2002Net sales
    
    $
    272,640
    
    
    
    $
    78,997
    
    
    $
    318,441
    
    
    $
    286,788Cost of sales
    
    
    122,718
    
    
    
    
    35,780
    
    
    
    143,770
    
    
    
    126,174Gross profit
    
    
    149,922
    
    
    
    
    43,217
    
    
    
    174,671
    
    
    
    160,614Operating expenses:Selling, general and administrative expenses
    
    
    99,096
    
    
    
    
    30,999
    
    
    
    120,451
    
    
    
    111,436Non-recurring expense (Note 16)
    
    
    
    
    
    
    
    30,707
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    11,388
    
    
    
    
    3,799
    
    
    
    14,399
    
    
    
    12,004Amortization
    
    
    5,427
    
    
    
    
    321
    
    
    
    1,437
    
    
    
    1,485Management fee to related party
    
    
    805
    
    
    
    
    524
    
    
    
    1,800
    
    
    
    1,800Total operating expenses
    
    
    116,988
    
    
    
    
    66,350
    
    
    
    138,087
    
    
    
    126,725Gain on termination of defined benefit
pension plan (Note 15)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,231Other income (expense), net
    
    
    417
    
    
    
    
    (140
    )
    
    
    681
    
    
    
    320Income (loss) from operations
    
    
    33,351
    
    
    
    
    (23,273
    )
    
    
    37,265
    
    
    
    35,440Interest expense, net
    
    
    13,698
    
    
    
    
    3,841
    
    
    
    15,405
    
    
    
    13,227Interest expense on mandatorily redeemable
preferred stock and management purchased
preferred options
    
    
    5,458
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense on junior subordinated notes
    
    
    9,173
    
    
    
    
    3,058
    
    
    
    
    
    
    
    Distributions on guaranteed preferred
beneficial interests
    
    
    
    
    
    
    
    
    
    
    
    12,231
    
    
    
    12,231Write-down of note receivable (Note 4)
    
    
    
    
    
    
    
    
    
    
    
    11,258
    
    
    
    Income (loss) before income taxes
    
    
    5,022
    
    
    
    
    (30,172
    )
    
    
    (1,629
    )
    
    
    9,982Income tax provision (benefit)
    
    
    4,395
    
    
    
    
    (10,856
    )
    
    
    3,018
    
    
    
    3,879Net income (loss)
    
    $
    627
    
    
    
    $
    (19,316
    )
    
    $
    (4,647
    )
    
    $
    6,103
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
 (dollars in thousands)
 Successor
    
    
    
    PredecessorNine months
    
    
    
    Three months
    
    
    Year
    
    
    Yearended
    
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    627
    
    
    
    $
    (19,316
    )
    
    $
    (4,647
    )
    
    $
    6,103Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:Depreciation and amortization
    
    
    16,815
    
    
    
    
    4,120
    
    
    
    15,836
    
    
    
    13,489Dispositions of property and equipment
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    1,269Deferred income tax (benefit)
    
    
    4,156
    
    
    
    
    (12,475
    )
    
    
    1,108
    
    
    
    5,081PIK interest on unsecured subordinated notes
    
    
    590
    
    
    
    
    506
    
    
    
    1,954
    
    
    
    1,868Interest on mandatorily redeemable preferred stock
    
    
    5,458
    
    
    
    
    
    
    
    
    
    
    
    
    Write-down of note receivable
    
    
    
    
    
    
    
    
    
    
    
    11,258
    
    
    
    Prepayment penalty
    
    
    (1,097
    )
    
    
    
    
    
    
    
    
    
    
    
    Changes in operating items, net of effects of
acquisitions:Decrease (increase) in accounts receivable, net
    
    
    937
    
    
    
    
    (5,457
    )
    
    
    (3,528
    )
    
    
    892Decrease (increase) in inventories, net
    
    
    869
    
    
    
    
    (724
    )
    
    
    (4,989
    )
    
    
    (1,184
    )Decrease (increase) in other assets
    
    
    1,786
    
    
    
    
    1,464
    
    
    
    (1,236
    )
    
    
    2,484Increase (decrease) in accounts payable
    
    
    1,699
    
    
    
    
    5,832
    
    
    
    (3,537
    )
    
    
    1,302(Decrease) increase in other accrued liabilities
    
    
    (26,842
    )
    
    
    
    25,345
    
    
    
    (1,974
    )
    
    
    (383
    )Other items, net
    
    
    955
    
    
    
    
    6
    
    
    
    1,925
    
    
    
    (1,114
    )Net cash provided by (used for) operating activities
    
    
    6,028
    
    
    
    
    (699
    )
    
    
    12,170
    
    
    
    29,807Cash flows from investing activities:Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    104Payment for acquired businesses, net of cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,592
    )Capital expenditures
    
    
    (9,404
    )
    
    
    
    (2,586
    )
    
    
    (11,479
    )
    
    
    (22,989
    )Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231
    )Other, net
    
    
    
    
    
    
    
    (23
    )
    
    
    (143
    )
    
    
    1,062Net cash used for investing activities
    
    
    (9,404
    )
    
    
    
    (2,609
    )
    
    
    (11,602
    )
    
    
    (43,646
    )Cash flows from financing activities:Borrowings of senior term loans
    
    
    217,500
    
    
    
    
    
    
    
    
    
    
    
    
    20,220Repayments of senior term loans
    
    
    (62,189
    )
    
    
    
    
    
    
    
    (9,269
    )
    
    
    (4,518
    )Borrowings of revolving credit loans
    
    
    4,728
    
    
    
    
    4,709
    
    
    
    8,963
    
    
    
    480Repayments of revolving credit loans
    
    
    (52,932
    )
    
    
    
    Borrowings of unsecured subordinated notes
    
    
    47,500
    
    
    
    
    
    
    
    
    
    
    
    
    Repayments of unsecured subordinated notes
    
    
    (44,569
    )
    
    
    
    
    
    
    
    
    
    
    
    Principal payments under capitalized lease obligations
    
    
    (38
    )
    
    
    
    (14
    )
    
    
    (55
    )
    
    
    (73
    )Payment on STS preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174
    )Financing fees, net
    
    
    (7,592
    )
    
    
    
    
    
    
    
    (1,447
    )
    
    
    (1,387
    )Purchase of predecessor common stock
    
    
    (214,724
    )
    
    
    
    
    
    
    
    
    
    
    
    Receipt of successor equity proceeds
    
    
    147,980
    
    
    
    
    
    
    
    
    
    
    
    
    Merger transaction expenses
    
    
    (2,171
    )
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used for) financing activities
    
    
    33,493
    
    
    
    
    4,695
    
    
    
    (1,808
    )
    
    
    14,548Net increase (decrease) in cash and cash equivalents
    
    
    30,117
    
    
    
    
    1,387
    
    
    
    (1,240
    )
    
    
    709Cash and cash equivalents at beginning of period
    
    
    2,915
    
    
    
    
    1,528
    
    
    
    2,768
    
    
    
    2,059Cash and cash equivalents at end of period
    
    $
    33,032
    
    
    
    $
    2,915
    
    
    $
    1,528
    
    
    $
    2,768
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES   AccumulatedPredecessor
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Class A
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Successor Common Stock
    
    
    Paid-in
    
    
    Preferred
    
    
    Accumulated
    
    
    Comprensive
    
    
    StockholdersStock
    
    
    Class A
    
    
    Class C
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Income
    
    
    EquityBeginning Balance at December 31, 2001- Predecessor
    
    $
    71
    
    
    $
    
    
    
    $
    
    
    
    $
    56,252
    
    
    $
    
    
    
    $
    (2,909
    )
    
    $
    
    
    
    $
    53,414Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,103
    
    
    
    
    
    
    
    6,103Purchase and retirement of 20,000 shares of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231
    )Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,711
    )
    
    
    
    
    
    
    (3,194
    )
    
    
    
    
    
    
    (6,905
    )Change in cumulative foreign translation adjustment (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Ending Balance at December 31, 2002- Predecessor
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    52,310
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    52,386Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,647
    )
    
    
    
    
    
    
    (4,647
    )Change in cumulative foreign translation adjustment (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135
    )
    
    
    (135
    )Ending Balance at December 31, 2003- Predecessor
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    52,310
    
    
    
    
    
    
    
    (4,647
    )
    
    
    (130
    )
    
    
    47,604Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,316
    )
    
    
    
    
    
    
    (19,316
    )Change in cumulative foreign translation adjustment (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Ending Balance at March 31, 2004 - Predecessor
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    52,310
    
    
    
    
    
    
    
    (23,963
    )
    
    
    (120
    )
    
    
    28,298Close Predecessors stockholders equity at merger date
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    (52,310
    )
    
    
    
    
    
    
    23,963
    
    
    
    120
    
    
    
    (28,298
    )Issuance of 5,805.3 shares of Class A Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,443Issuance of 2,787.1 shares of Class C Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,787Issuance of 82,104.8 shares of The Hillman Companies, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,642
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    78,643Ending Balance at March 31, 2004 - Successor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,872
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    86,873Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    627
    
    
    
    
    
    
    
    627Dividends to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,420
    )
    
    
    
    
    
    
    (1,901
    )
    
    
    
    
    
    
    (7,321
    )Change in cumulative foreign translation adjustment (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110
    )
    
    
    (110
    )Change in derivative security value (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (18
    )Ending Balance at December 31, 2004 - Successor
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    81,452
    
    
    $
    1
    
    
    $
    (1,274
    )
    
    $
    (128
    )
    
    $
    80,051
   (1)
    
    The cumulative foreign translation adjustment and change in derivative security value are net of taxes
and represent the only items of other comprehensive income. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 1. Basis of Presentation: The accompanying financial statements include the consolidated accounts of The Hillman
Companies, Inc. (the Company or Hillman) and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. On March 31, 2004, The Hillman Companies, Inc. was acquired by an affiliate of Code Hennessy &
Simmons LLC (CHS). Pursuant to the terms and conditions of an Agreement and Plan of Merger
(Merger Agreement) dated as of February 14, 2004, the Company was merged with an affiliate of CHS
with the Company surviving the merger (Merger Transaction). The total consideration paid in the
Merger Transaction was $511,646 including repayment of outstanding debt and including the value of
the Companys outstanding Trust Preferred Securities ($102,395 at merger). Prior to the merger, Allied Capital Corporation (Allied Capital) owned 96.8 % of the Companys
common stock. As a result of the change of control, an affiliate of CHS owns 49.1% of the Companys
common stock and 54.5% of the Companys voting common stock, Ontario Teachers Pension Plan
(OTPP) owns 27.9% of the Companys common stock and 31.0% of the Companys voting common stock
and HarbourVest Partners VI owns 8.7% of the Companys common stock and 9.7% of the Companys
voting common stock. Certain members of management own 14.1% of the Companys common stock and 4.5%
of the Companys voting common stock. CHS is a private equity firm that manages approximately $1.56 billion in capital in four funds. The
acquisition of the Company by CHS adds to their existing portfolio of middle market manufacturing
and distribution businesses. The Companys Consolidated Balance Sheet and its related Consolidated Statements of Operations,
Cash Flows and Changes in Stockholders Equity for the periods presented prior to the March 31,
2004 Merger Transaction are referenced herein as the predecessor financial statements (the
Predecessor or Predecessor Financial Statements). The Companys Consolidated Balance Sheet as
of December 31, 2004 and its related Consolidated Statements of Operations, Cash Flows and Changes
in Stockholders Equity for the nine months ended December 31, 2004 are referenced herein as the
successor financial statements (the Successor or Successor Financial Statements). The
accompanying Successor Financial Statements reflect the allocation of the aggregate purchase price
of $511,646, including the value of the Companys Trust Preferred Securities, to the assets and
liabilities of Hillman based on fair values at the date of the merger in accordance with Statement
of Financial Accounting Standards No. 141, Business Combinations. The following table reconciles
the fair value of the acquired assets and assumed liabilities to the total purchase price: Accounts receivable
    
    $
    40,840Inventory
    
    
    65,496Property and equipment
    
    
    63,264Goodwill
    
    
    219,051Intangible assets
    
    
    173,269Other assets
    
    
    3,246Total assets acquired
    
    
    565,166Less:Liabilities assumed
    
    
    41,190Junior subordinated debentures
    
    
    114,725Total assumed liabilities
    
    
    155,915Total purchase price
    
    $
    409,251
 34




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 1. Basis of Presentation (continued): The purchase price includes transaction related costs aggregating $2,171 which were associated
with CHSs purchase of the Company. The following table indicates the pro forma financial statements of the Company for the years ended
December 31, 2004 (including non-recurring charges of $30,707 as discussed in Note 16,
Non-Recurring Expense), 2003 and 2002. The pro forma financial statements give effect to the Merger
Transaction and subsequent refinancing and the acquisitions described in Note 4, Acquisitions and
Divestitures, as if they had occurred on January 1, 2002: 2004
    
    
    2003
    
    
    2002Net sales
    
    $
    351,637
    
    
    $
    318,441
    
    
    $
    304,107Net loss
    
    
    21,379
    
    
    
    14,960
    
    
    
    3,873
 The pro forma results are based on assumptions that the Company believes are reasonable under the
circumstances. The pro forma results are not necessarily indicative of the operating results that
would have occurred if the acquisition had been effective January 1, 2002, nor are they intended to
be indicative of results that may occur in the future. The underlying pro forma information
includes the historical financial results of the Company, the Companys financing arrangements, and
certain purchase accounting adjustments. Nature of Operations: The Company is one of the largest providers of value-added merchandising services and
hardware-related products to retail markets in North America through its wholly-owned subsidiary,
The Hillman Group, Inc. (the Hillman Group). A subsidiary of the Hillman Group operates in Canada
under the name The Hillman Group Canada, Ltd. The Hillman Group provides merchandising services and
products such as fasteners and related hardware items, key duplication equipment, keys and related
accessories, and identification equipment and items to retail outlets, primarily hardware stores,
home centers and mass merchants. The Company has approximately 20,000 customers, the largest three
of which accounted for 38.3% of net sales in 2004. The average single sale in 2004 was less than
six hundred dollars. 35




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies: Cash Equivalents: Cash equivalents consist of commercial paper, U.S. Treasury obligations and other liquid securities
purchased with initial maturities less than 90 days and are stated at cost which approximates
market value. Restricted Investments: Restricted investments, which are carried at market value, represent assets held in a Rabbi Trust
to fund deferred compensation liabilities due to the Companys employees. See Note 11, Deferred
Compensation Plans. Accounts Receivable and Allowance for Doubtful Accounts: The Company establishes the allowance for doubtful accounts using the specific identification
method and also provides a reserve in the aggregate. The estimates for calculating the aggregate
reserve are based on historical information. The allowance for doubtful accounts was $526 and $524
as of December 31, 2004 and 2003, respectively. Inventories: Inventories consisting predominantly of finished goods are valued at the lower of cost or market,
cost being determined principally on the first-in, first-out method. Excess and obsolete
inventories are carried at net realizable value. The historical usage rate is the primary factor
used by the Company in assessing the net realizable value of excess and obsolete inventory. A
reduction in the carrying value of an inventory item from cost to market is recorded in an
inventory reserve for inventory with no usage in the preceding twenty-four month period or with on
hand quantities in excess of twenty-four months average usage. The inventory reserve amounts were
$3,558 and $3,189 at December 31, 2004 and 2003, respectively. Property and Equipment: Property and equipment, including assets acquired under capital leases, are carried at cost and
include expenditures for new facilities and major renewals. Maintenance and repairs are charged to
expense as incurred. The cost and related accumulated depreciation are removed from their
respective accounts when assets are sold or otherwise disposed of and the resulting gain or loss is
reflected in current operations. Depreciation: For financial accounting purposes, depreciation, including that related to plant and equipment
acquired under capital leases, is computed on the straight-line method over the estimated useful
lives of the assets, generally three to ten years or over the terms of the related leases. Goodwill and Other Intangible Assets: The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and accordingly, goodwill
is no longer amortized, but is reviewed annually for impairment. Other intangible assets arising
principally from the Merger Transaction are amortized on a straight-line basis over periods ranging
from four to twenty-three years except the trademarks which are not amortized due to their
indefinite useful lives. 36




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies (continued): Long-Lived Assets: Under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company has evaluated its long-lived assets for financial impairment and will continue
to evaluate them based on the estimated undiscounted future cash flows as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully recoverable. Income Taxes: Deferred income taxes are computed using the asset and liability method. Under this method,
deferred income tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities (temporary differences) and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are provided for tax benefits where it is more likely than not that certain
tax benefits will not be realized. Adjustments to valuation allowances are recorded from changes in
utilization of the tax related item. See Note 6, Income Taxes. Retirement Benefits: Certain employees of the Company are covered under a profit-sharing and retirement savings plan
(defined contribution plan). See Note 15, Retirement Benefits. Revenue Recognition: Revenue from sales of products is recorded upon the passing of title and risks of ownership to the
customer, which occurs upon the shipment of goods. The Company offers a variety of sales incentives to its customers primarily in the form of
discounts and rebates. Discounts are recognized in the financial statements at the date of the
related sale. Rebates are estimated based on the anticipated rebate to be paid and a portion of the
estimated cost of the rebate is allocated to each underlying sales transaction. Rebates and
discounts are included in the determination of net sales. The Company also establishes reserves for customer returns and allowances. The reserve is
established based on historical rates of returns and allowances. The reserve is adjusted quarterly
based on actual experience. Shipping and Handling: The costs incurred to ship product to customers, including freight and handling expenses, are
included in selling, general and administrative expenses on the Companys Statements of Operations.
The Predecessor Companys shipping and handling costs were
$3,629, $15,916, and $13,913 for the three months ended
March 31, 2004 and the years ended December 31, 2003 and 2002,
respectively. The Successor Companys shipping and handling
costs were $12,790 for the nine months ended December 31, 2004. Research and Development: The Company incurs research
and development costs consisting primarily of internal wages and
benefits in connection with improvements to the key duplicating and
engraving machines. The Predecessor Companys research and
development costs were $277, $1,381, and $1,510 for the three months
ended March 31, 2004 and the years ended December 31, 2003 and 2002,
respectively. The Successor Companys research and development
costs were $796 for the nine months ended December 31, 2004. 37




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 2. Summary of Significant Accounting Policies (continued): Stock Based Compensation: The Company applies the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations in accounting
for its stock based employee compensation plans. The Company is also subject to disclosure
requirements of SFAS 123, Accounting for Stock Based Compensation (SFAS 123).
Stock compensation expense as recorded under the APB 25 intrinsic
value method approximates the fair value model prescribed by SFAS
123; accordingly no pro forma disclosures are necessary under SFAS
123.
See Note 14, Stock
Based Compensation. Fair Value of Financial Instruments: Cash, accounts receivable, short-term borrowings, accounts payable, accrued liabilities and bank
revolving credit are reflected in the consolidated financial statements at fair value due to the
short-term maturity or revolving nature of these instruments. The fair values of the Companys debt
instruments are disclosed in Note 9, Long-Term Debt. The fair value of the Trust Preferred
Securities is disclosed in Note 12, Guaranteed Preferred Beneficial Interest in the Companys
Junior Subordinated Debentures. Translation of Foreign Currencies: The translation of the Companys Canadian foreign currency based financial statements into U.S.
dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet
date and for revenue and expense accounts using an average exchange rate during the period. The
exchange rates represent the noon buying rates reported by the Federal Reserve Bank of New York. Comprehensive Income (Loss): The components of comprehensive income (loss) were as follows: Successor
    
    
    Predecessor
    
    
    Predecessor
    
    
    PredecessorNine months
    
    
    Three months
    
    
    Year
    
    
    Yearended
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2004
    
    
    2003
    
    
    2002Net income (loss)
    
    $
    627
    
    
    $
    (19,316
    )
    
    $
    (4,647
    )
    
    $
    6,103Change in derivative security value, net
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment, net
    
    
    (110
    )
    
    
    10
    
    
    
    (135
    )
    
    
    5Comprehensive income (loss)
    
    $
    499
    
    
    $
    (19,306
    )
    
    $
    (4,782
    )
    
    $
    6,108
 Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses for the reporting
period. Actual results may differ from estimates. Reclassifications: Certain amounts in the 2003 and 2002 consolidated financial statements have been reclassified to
conform to the 2004 presentation. 38




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 3. Recent Accounting Pronouncements: In November 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 151, Inventory Costs (SFAS 151). SFAS 151 amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and spoilage. This statement requires that these items be
expensed as incurred and not included in overhead. In addition, SFAS 151 requires that allocation
of fixed production overhead to conversion costs should be based on normal capacity of the
production facilities. This Statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is currently evaluating the impact from this standard on
its results of operations and financial position. In December 2003, the Financial Accounting Standards Board issued Statement No. 123(R),
Share-Based Payment (SFAS 123(R)). This statement replaced Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) will require compensation
costs related to share-based payment transactions to be recognized in the financial statements
(with limited exceptions). The amount of compensation cost will be measured based on the grant-date
fair value of the equity or liability instruments issued. Compensation cost will be recognized over
the period that an employee provides service in exchange for the award. This statement is effective
as of the beginning of the first interim or annual reporting period that begins after June 15,
2005. The Company is currently evaluating the impact from this standard on its results of
operations and financial position. 4. Acquisitions and Divestitures: On October 3, 2002, the Company, through its Hillman Group subsidiary, purchased the net
assets of the DIY division (DIY) of the Fastenal Company of Winona, MN. DIY distributes
fasteners, anchors, picture hanging wire, hooks, tacks, and brads to national hardware cooperatives
and home centers. The Companys management believes that the purchase of the DIY business will
further strengthen the Companys position in its core market segments, particularly with the
national hardware cooperatives. The accompanying financial statements reflect the allocation of the aggregate purchase price of
$15,218 to the assets and liabilities of the Company based on fair values at the date of the
transaction in accordance with SFAS No. 141, Business Combinations. The following table
reconciles the fair value of the acquired assets and assumed liabilities to the total purchase
price: Accounts Receivable
    
    $
    3,658Inventory
    
    
    7,323Property and equipment
    
    
    2,490Other Assets
    
    
    3,523Goodwill
    
    
    5,976Total assets acquired
    
    
    22,970Less assumed liabilities
    
    
    7,752Total purchase price
    
    $
    15,218
 39




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 4. Acquisitions and Divestitures (continued): In connection with the DIY acquisition, the Company developed an overall plan that included
the elimination of redundant headcount and facilities. In accordance with EITF No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination, the Company
accrued $3,395 of estimated costs related to the DIY acquisition plan in the fourth quarter of
2002. The estimated costs consisted of approximately $1,500 of fixed asset disposals, $900 of
facilities lease costs, $500 of inventory conversion and relocation expense and $495 for planned
workforce reductions. The integration was substantially completed by December 31, 2003. Additional reserves of $3,470, before tax adjustments of $1,422, have been established in 2003 for
acquisition related costs associated with the purchase of DIY and recorded to goodwill. Additional
costs include severance of $256, facility lease of $1,230, inventory adjustments of $832, and
customer conversion costs which include product buybacks of $1,581. The actual cost of fixed asset
disposals was $429 less than the original estimate. The following table provides a rollforward from December 31, 2002 to December 31, 2004 of the
remaining liabilities and acquisition related charges recorded by the Company: Severence
    
    
    
    
    
    
    
    
    
    
    Fixed& Related
    
    
    Facility
    
    
    Inventory
    
    
    Asset
    
    
    CustomerCosts
    
    
    Lease
    
    
    Adjustments
    
    
    Disposal
    
    
    Conversions
    
    
    TotalAs of December 31, 2002
    
    $
    495
    
    
    $
    900
    
    
    $
    500
    
    
    $
    1,500
    
    
    $
    
    
    
    $
    3,395Additions (Reductions)
    
    
    256
    
    
    
    1,230
    
    
    
    832
    
    
    
    (429
    )
    
    
    1,581
    
    
    
    3,470Payments
    
    
    (217
    )
    
    
    
    
    
    
    (952
    )
    
    
    (1,071
    )
    
    
    (399
    )
    
    
    (2,639
    )As of December 31, 2003
    
    $
    534
    
    
    $
    2,130
    
    
    $
    380
    
    
    $
    
    
    
    $
    1,182
    
    
    $
    4,226Additions (Reductions)
    
    
    (22
    )
    
    
    93
    
    
    
    (35
    )
    
    
    
    
    
    
    (36
    )
    
    
    Payments
    
    
    (512
    )
    
    
    (602
    )
    
    
    (345
    )
    
    
    
    
    
    
    (1,042
    )
    
    
    (2,501
    )As of December 31, 2004
    
    $
    
    
    
    $
    1,621
    
    
    $
    
    
    
    $
    
    
    
    $
    104
    
    
    $
    1,725
 On May 1, 2002, the Hillman Group purchased certain assets of the Lowes specialty fastener
business from R&B, Inc. for cash consideration of $6,207. The purchase price has been allocated as
follows: $690 to accounts receivable, $1,338 to inventory, $138 to fixed assets, $51 to accrued
liabilities and $4,092 to goodwill. The purchase of the specialty fastener business will expand the
breadth of the Companys product offering to Lowes. In connection with this transaction, the
Company settled litigation filed by R&B, Inc. in February 1996 related to the Companys sale of the
Dorman Products division. The litigation settlement in the amount of $1,250 was fully reserved on
the Companys balance sheet, and accordingly, there was no charge to income in 2002. On April 13, 2002, the Company entered into a Unit Repurchase Agreement with GC-Sun Holdings, L.P.
(G-C), pursuant to which G-C exercised its call right under the G-C partnership agreement to
purchase the Companys interest in G-C. The Unit Repurchase Agreement closed on June 25, 2002. In
exchange for its interest in G-C, the Company received a $10,000 subordinated note from G-C.
Interest on the note is payable quarterly at a rate of 18% from May 1, 2002 to April 30, 2003, 17%
from May 1, 2003 to April 30, 2004, and 16% thereafter. G-Cs payment of interest on the note is
subject to certain restrictions under the terms of the subordinated note agreement. If such
restrictions do not permit the current payment of interest in cash when due, accrued interest is added to the
principal. 40




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 4. Acquisitions and Divestitures (continued): In February 2003, G-C sold the assets of its largest operating division, Kar Products. The
proceeds of the sale were primarily used to pay down G-Cs senior creditors. Following the sale of
Kar Products, the Company estimated the enterprise value of G-C based on the cash flows and book
value of the remaining operating division under a held for sale methodology. The excess of the
estimated enterprise value less debt obligations senior to the G-C note was determined to be
insufficient to support the value of the G-C note and accrued interest. Accordingly, the Company
recorded an $11,258 charge to income during the year ended December 31, 2003 to write-down the face
value of the note and accrued interest thereon to zero. The G-C note was distributed to the Companys common stockholders on March 31, 2004. 5. Related Party Transactions On September 26, 2001, the Company was acquired by Allied Capital pursuant to the terms and
conditions of an Agreement and Plan of Merger dated as of June 18, 2001. In connection with the
Agreement and Plan of Merger, the Company is obligated to pay management fees to a subsidiary of
Allied Capital for management services rendered in the amount of $1,800 per year, plus out of
pocket expenses, for calendar years subsequent to 2001. The Company has recorded a management fee
charge of $524, $1,800 and $1,800 on the Predecessors Statement of Operations for the three months
ended March 31, 2004 and the years ended December 31, 2003 and 2002, respectively. Payment of
management fees was due annually after delivery of the Companys annual audited financial
statements to the Board of Directors of the Company. The management fee for the year ended
December 31, 2002 was paid in March 2003 and the management fee for the three months ended December
31, 2001 was paid in March 2002. The obligation to pay management fees to Allied Capital was
terminated upon the payment of outstanding fees in the amount of $2,324 on March 31, 2004 in
connection with the close of the Merger Transaction. On March 31, 2004, the Company was acquired by an affiliate of CHS. In connection with the CHS
acquisition, the Company is obligated to pay management fees to a subsidiary of CHS in the amount
of $58 per month and to pay management fees to a subsidiary of OTPP in the amount of $26 per month,
plus out of pocket expenses, for each month commencing with the closing date of the Merger
Transaction. The Company has recorded management fee charges and expenses from CHS and OTPP of
$805 for the nine month period ended December 31, 2004. The Predecessor Company incurred interest expense to Allied Capital on the unsecured subordinated
debt at a fixed rate of 18.0% per annum. Cash interest payments were required on a quarterly basis
at a fixed rate of 13.5% with the remaining 4.5% fixed rate (the PIK Amount) being added to the
principal balance. The subordinated debt and accrued interest thereon of $45,571 were paid in full
at March 31, 2004 in connection with the Merger Transaction. See discussion above and Note 9,
Long-Term Debt, for additional details. 41




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 6. Income Taxes The components of the Companys income tax provision (benefit) for the three years ended
December 31, 2004 were as follows: Successor
    
    
    
    PredecessorNine Months
    
    
    
    Three Months
    
    
    Year
    
    
    Yearended
    
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    
    2004
    
    
    2003
    
    
    2002Current:Federal & State
    
    $
    78
    
    
    
    $
    60
    
    
    $
    397
    
    
    $
    232Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current
    
    
    78
    
    
    
    
    60
    
    
    
    397
    
    
    
    232Deferred:Federal & State
    
    
    4,156
    
    
    
    
    (12,475
    )
    
    
    2,748
    
    
    
    3,872Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    4,156
    
    
    
    
    (12,475
    )
    
    
    2,748
    
    
    
    3,872Valuation allowance
    
    
    161
    
    
    
    
    1,559
    
    
    
    (127
    )
    
    
    (225
    )Provision (benefit)
for income taxes
    
    $
    4,395
    
    
    
    $
    (10,856
    )
    
    $
    3,018
    
    
    $
    3,879
 The Company has U.S. federal net operating loss (NOL) carryforwards for tax purposes,
totaling $84,004 as of December 31, 2004, that are available to offset future taxable income.
These carryforwards expire from 2019 to 2024. Limitations on utilization may apply to
approximately $61,621 of these loss carryforwards. Management believes that these losses will be
fully utilized prior to the expiration date. No valuation allowance has been provided against the
federal NOL. The Company has state net operating loss carryforwards with an aggregate tax benefit of $6,525
which expire from 2005 to 2024. A valuation allowance of $1,224 has been established for these
deferred tax assets. The Company has federal unused capital losses totaling $36,706 as of December 31, 2004 that are
available to offset future capital gains. These carryforwards expire in 2006. A valuation
allowance of $12,480 has been established for these deferred tax assets. The Company also has $283
of general business tax credits which expire from 2009 to 2021. A valuation allowance of $283 has
been established for these tax credits. In 2004, the change in the valuation reserve is due the
Merger Transaction with CHS and an adjustment and utilization of capital loss and state net
operating loss carryforwards. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts
of the assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. 42




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 6. Income Taxes (continued): The table below reflects the significant components of the Companys net deferred tax assets
and liabilities at December 31, 2004 and 2003: Successor
    
    
    
    PredecessorAs of December 31, 2004
    
    
    
    As of December 31, 2003Current
    
    
    Non-current
    
    
    
    Current
    
    
    Non-currentDeferred Tax Asset:Inventory
    
    $
    4,087
    
    
    $
    
    
    
    
    $
    5,060
    
    
    $
    Acquisition related/severance reserve
    
    
    1,009
    
    
    
    581
    
    
    
    
    2,125
    
    
    
    Bad debt reserve
    
    
    834
    
    
    
    
    
    
    
    
    797
    
    
    
    Casualty loss reserve
    
    
    546
    
    
    
    745
    
    
    
    
    960
    
    
    
    1,032Deferred compensation
    
    
    31
    
    
    
    1,701
    
    
    
    
    468
    
    
    
    2,428Medical insurance reserve
    
    
    467
    
    
    
    
    
    
    
    
    574
    
    
    
    Federal net operating loss
    
    
    
    
    
    
    28,561
    
    
    
    
    
    
    
    
    17,584State net operating loss
    
    
    
    
    
    
    6,525
    
    
    
    
    
    
    
    
    4,289Equity issued, not exercised
    
    
    
    
    
    
    746
    
    
    
    
    
    
    
    
    Original issue discount amortization
    
    
    
    
    
    
    467
    
    
    
    
    
    
    
    
    420Transaction costs
    
    
    
    
    
    
    608
    
    
    
    
    
    
    
    
    635Federal capital loss carryforwards
    
    
    
    
    
    
    12,480
    
    
    
    
    
    
    
    
    12,480All other items
    
    
    1,471
    
    
    
    500
    
    
    
    
    1,175
    
    
    
    809Gross deferred tax assets
    
    
    8,445
    
    
    
    52,914
    
    
    
    
    11,159
    
    
    
    39,677Valuation allowance for
deferred tax assets
    
    
    (1,925
    )
    
    
    (12,062
    )
    
    
    
    (5,876
    )
    
    
    (11,407
    )Net deferred tax assets
    
    $
    6,520
    
    
    $
    40,852
    
    
    
    $
    5,283
    
    
    $
    28,270Deferred Tax Liability:Intangible asset amortization
    
    $
    
    
    
    $
    46,147
    
    
    
    $
    
    
    
    $
    1,992Property and equipment
    
    
    
    
    
    
    5,435
    
    
    
    
    
    
    
    
    5,800All other items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Gross deferred tax liabilities
    
    $
    
    
    
    $
    51,582
    
    
    
    $
    
    
    
    $
    7,772
 Realization of the net deferred tax assets is dependent on generating sufficient taxable
income prior to their expiration. Although realization is not assured, management believes it is
more likely than not that the net deferred tax assets will be realized. The amount of net deferred
tax assets considered realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced. 43




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 6. Income Taxes (continued): Below is a reconciliation of statutory income tax rates to the effective income tax rates for
the periods indicated: Successor
    
    
    
    PredecessorNine Months
    
    
    
    Three Months
    
    
    Year
    
    
    Yearended
    
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    
    2004
    
    
    2003
    
    
    2002Statuatory federal income tax rate
    
    
    34.0
    %
    
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Impact of foreign losses for which a
current tax benefit is not available
    
    
    0.0
    %
    
    
    
    -0.4
    %
    
    
    -7.3
    %
    
    
    0.0
    %State and local income taxes, net of
U.S. federal income tax benefit
    
    
    16.2
    %
    
    
    
    7.9
    %
    
    
    -3.5
    %
    
    
    6.7
    %Increase in valuation allowance
    
    
    0.0
    %
    
    
    
    0.0
    %
    
    
    -208.7
    %
    
    
    0.0
    %Other permanent differences, principally
interest expense on manditorily redeemable
preferred stock and amortization expense
    
    
    34.2
    %
    
    
    
    -0.4
    %
    
    
    -19.9
    %
    
    
    -1.8
    %Effect of change in valuation allowances
    
    
    3.2
    %
    
    
    
    -5.2
    %
    
    
    20.1
    %
    
    
    0.0
    %Effective income tax rate
    
    
    87.6
    %
    
    
    
    35.9
    %
    
    
    -185.3
    %
    
    
    38.9
    %
 7. Property and Equipment, net: Property and equipment, net, consists of the following at December 31, 2004 and 2003: EstimatedUseful Life
    
    
    Successor
    
    
    
    Predecessor(Years)
    
    
    2004
    
    
    
    2003Land
    
    
    
    
    
    $
    131
    
    
    
    $
    131Buildings
    
    
    27
    
    
    
    781
    
    
    
    
    884Leasehold improvements
    
    
    3-10
    
    
    
    2,095
    
    
    
    
    4,029Machinery and equipment
    
    
    3-10
    
    
    
    66,823
    
    
    
    
    74,859Furniture and fixtures
    
    
    3-5
    
    
    
    1,080
    
    
    
    
    1,511Construction in process
    
    
    
    
    
    
    445
    
    
    
    
    Property and equipment, gross
    
    
    
    
    
    
    71,355
    
    
    
    
    81,414Less: Accumulated depreciation
    
    
    
    
    
    
    10,244
    
    
    
    
    16,813Property and equipment, net
    
    
    
    
    
    $
    61,111
    
    
    
    $
    64,601
 44




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 8. Other Intangibles, net: Intangible assets are amortized over their useful lives and are subject to a lower of cost or
market impairment testing. The values assigned to intangible assets in connection with the March 31, 2004 Merger Transaction
were determined by an independent appraisal. Other Intangibles, net as of December 31, 2004 and
2003 consist of the following: Successor
    
    
    PredecessorEstimated
    
    
    
    
    
    
    Estimated2004
    
    
    Useful Life
    
    
    2003
    
    
    Useful LifeAmount
    
    
    (Years)
    
    
    Amount
    
    
    (Years)Customer Relationships
    
    $
    114,897
    
    
    
    23
    
    
    $
    
    
    
    
    Trademarks
    
    
    44,670
    
    
    Indefinite
    
    
    
    6,500
    
    
    
    25Patents
    
    
    7,960
    
    
    
    9
    
    
    
    6,700
    
    
    
    8Proprietary Software
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    8Non Compete Agreements
    
    
    5,742
    
    
    
    4
    
    
    
    1,250
    
    
    
    4-5Intangible assets, gross
    
    
    173,269
    
    
    
    
    
    
    
    15,450Less: Accumulated amortization
    
    
    5,427
    
    
    
    
    
    
    
    5,819Other Intangibles, net
    
    $
    167,842
    
    
    
    
    
    
    $
    9,631
 The Predecessor
Companys amortization expense for amortizable assets was $321,
$1,437, and $1,485 for the three months ended
March 31, 2004 and the years ended December 31, 2003 and 2002,
respectively. The Successor Companys amortization expense for amortizable assets for
the nine months ended December 31, 2004 was $5,427 and for the years ending December 31, 2005,
2006, 2007, 2008, and 2009 are estimated to be $7,236, $7,236, $6,762, $6,525, and $6,364,
respectively. 9. Long-Term Debt: On March 31, 2004, the Company, through its Hillman Group, Inc. subsidiary, refinanced its
revolving credit and senior term loans with a Senior Credit Agreement (the Senior Credit
Agreement) consisting of a $40,000 revolving credit (the Revolver) and a $217,500 Term B Loan
(the Term Loan) collateralized by the Companys cash, accounts receivable, inventories, and fixed
assets. The Senior Credit Agreement has a seven-year term and provides borrowings at interest
rates based on the London Inter-bank Offered Rates (the LIBOR) plus a margin of between 2.25% and
3.00% (the LIBOR Margin), or prime (the Base Rate) plus a margin of between 1.25% and 2.0% (the
Base Rate Margin). The applicable LIBOR Margin and Base Rate Margin is based on the Companys
leverage at the date of the preceding fiscal quarter. In accordance with the Senior Credit
Agreement, letter of credit commitment fees are based on the average daily face amount of each
outstanding letter of credit multiplied by a letter of credit margin of between 2.25% and 3.00% per
annum (the Letter of Credit Margin.) The Letter of Credit Margin is also based on the Companys
leverage at the date of the preceding fiscal quarter. The Company also pays a Commitment fee of
0.50% per annum on the average daily unused Revolver balance. The Senior Credit Agreement, among other provisions, contains financial covenants requiring the
maintenance of specific leverage and interest coverage ratios and levels of financial position,
restricts the incurrence of additional debt and the sale of assets, and permits acquisitions with
the consent of the lenders. In addition, the Senior Credit Agreement prohibits the payment of
dividends on any of the Companys equity securities. The Company
was in compliance with all provisions of the Senior Credit Agreement
as of December 31, 2004. 45




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 9. Long-Term Debt (continued): In addition, on March 31, 2004, the Company, through The Hillman Group, Inc., issued $47,500
of unsecured subordinated notes to Allied Capital Corporation maturing on September 30, 2011
(Subordinated Debt Issuance). Interest on the Subordinated Debt Issuance is at a fixed rate of
13.5% per annum, with cash interest payments required on a quarterly basis at a fixed rate of
11.25% commencing April 15, 2004. The outstanding principal balance of the Subordinated Debt
Issuance shall be increased on a quarterly basis at the remaining 2.25% fixed rate (the PIK
Amount). All of the PIK Amounts are due on the maturity date of the Subordinated Debt Issuance. As of December 31, 2004 and 2003, long-term debt is summarized as follows: Successor
    
    
    
    Predecessor2004
    
    
    
    2003Revolving Credit Agreement
    
    $
    
    
    
    
    $
    43,495Term Loan A
    
    
    
    
    
    
    
    24,003Term Loan B
    
    
    215,869
    
    
    
    
    36,555Subordinated Debt Issuance
    
    
    48,090
    
    
    
    
    44,062Capital Leases
    
    
    142
    
    
    
    
    194264,101
    
    
    
    
    148,309Less: amounts due in one year
    
    
    2,218
    
    
    
    
    9,322Long-term debt
    
    $
    261,883
    
    
    
    $
    138,987
 The aggregate minimum principal maturities of the long-term debt for each of the five fiscal years
following December 31, 2004, are as follows: 2005
    
    $
    2,2182006
    
    
    2,2192007
    
    
    2,2132008
    
    
    2,1922009
    
    
    2,1752010 and thereafter
    
    
    253,084
 As of December 31, 2004, the Company had $34,452 available under its revolving credit
agreement and letter of credit commitments outstanding of $5,548. The Company had outstanding debt
of $216,011 under its secured credit facilities at December 31, 2004, consisting of $215,869 in
term loans and $142 in capitalized lease obligations. The term loans consisted of a $215,325 Term
B Loan currently at a six (6) month LIBOR rate of 5.50% and a $544 Term B Loan currently at a three
(3) month LIBOR rate of 5.8125%. The capitalized lease obligations were at various interest rates. As of December 31, 2004, the estimated fair value of the Companys Term Loans approximates the
recorded value as determined in accordance with SFAS No. 107, Disclosure about Fair Value of
Financial Instruments. The Company discounted the future cash flows of its Term Loans based on
borrowing rates for debt with similar terms and remaining maturities. The fair value estimate is
made at a specific point in time, is subjective in nature, and involves uncertainties and matters
of significant judgment and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimate. 46




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 10. Leases: Certain warehouse and office space and equipment are leased under capital and operating leases
with terms in excess of one year. Future minimum lease payments under noncancellable leases
consisted of the following at December 31, 2004: Capital
    
    
    
    OperatingLeases
    
    
    
    Leases2005
    
    $
    53
    
    
    
    $
    6,7932006
    
    
    50
    
    
    
    
    4,9342007
    
    
    41
    
    
    
    
    3,0872008
    
    
    18
    
    
    
    
    2,6902009
    
    
    0
    
    
    
    
    2,327Later years
    
    
    0
    
    
    
    
    11,839Total minimum lease payments
    
    
    162
    
    
    
    $
    31,670Less amounts representing interest
    
    
    (20
    )Present value of net minimum lease payments
(including $43 currently payable)
    
    $
    142
 The Successors rental expense for all operating leases was $6,251 for the nine months ended
December 31, 2004 and the Predecessors rental expense for all operating leases was $2,055 for the
three months ended March 31, 2004 and $8,913 and $7,560 for the years ended December 31, 2003 and
2002, respectively. Certain leases are subject to terms of renewal and escalation clauses. 11. Deferred Compensation Plans: The Company maintains a deferred compensation plan for key employees (the Nonqualified
Deferred Compensation Plan) which allows for deferral of cash compensation from salary and annual
bonuses. Executive deferrals can grow at mutual fund investment rates. As of December 31, 2004 and 2003, the Companys consolidated balance sheet included $4,223 and
$7,077, respectively, in restricted investments representing the assets held in mutual funds to
fund deferred compensation liabilities due to the Companys current and former employees. The
current portion of the restricted investments was $75 and $1,145 as of December 31, 2004 and 2003,
respectively. During the three years ended December 31, 2004, distributions from the deferred compensation plans
aggregated $4,080 in 2004, $948 in 2003, and $1,142 in 2002.  12.
    Guaranteed Preferred Beneficial Interest in the Companys Junior Subordinated Debentures: In September 1997, The Hillman Group Capital Trust (Trust), a Grantor trust, completed a
$105,446 underwritten public offering of 4,217,724 11.6% Trust Preferred Securities (TOPrS). The
Trust invested the proceeds from the sale of the preferred securities and the related common
securities in an equal principal amount of 11.6% Junior Subordinated Debentures of Hillman due
September 2027. The Trust distributes monthly cash payments it receives from the Company as
interest on the debentures to preferred security holders at an annual rate of 11.6% on the
liquidation amount of $25 per preferred security. The Company may defer interest payments on the
debentures at any time, for up to 60 consecutive months. 47




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)  12.
    Guaranteed Preferred Beneficial Interest in the Companys Junior Subordinated Debentures (continued): If this occurs, the Trust will also defer distribution payments on the preferred securities.
The deferred distributions, however, will accumulate distributions at a rate of 11.6% per annum.
The Trust will redeem the preferred securities when the debentures are repaid, or at maturity on
September 30, 2027. The Company may redeem the debentures before their maturity at a price equal
to 100% of the principal amount of the debentures redeemed, plus accrued interest. When the
Company redeems any debentures before their maturity, the Trust will use the cash it receives to
redeem preferred securities and common securities as provided in the trust agreement. The Company
guarantees the obligations of the Trust on the Trust Preferred Securities. The Company has determined that the Trust is a variable interest entity and the Company is not the
primary beneficiary of the Trust pursuant to the provisions of FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entries (FIN 46R). Accordingly, pursuant to
the requirements of FIN 46R, the Company has de-consolidated the Trust at March 31, 2004.
Summarized below is the condensed financial information of the Trust as of December 31, 2004. Non-current assets  junior subordinated debentures
    
    $
    114,429Non-current liabilities  Trust Preferred Securities
    
    $
    114,429
 The non-current assets for the Trust relate to its investment in the 11.6% junior subordinated
deferrable interest debentures of Hillman due September 30, 2027. In accordance with Statement of Financial Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150), the TOPrS
constitute mandatorily redeemable financial instruments. The Company guarantees the obligations of
the Trust on the Trust Preferred Securities. Upon adoption of SFAS 150 on January 1, 2004, the
guaranteed preferred beneficial interest in the Companys Junior Subordinated Debentures have been
reclassified prospectively from the mezzanine section to the long-term liabilities section of the
Consolidated Balance Sheet. Items previously shown separately on the Consolidated
Statement of Operations as preferred security distributions of guaranteed preferred beneficial
interests are classified as interest expense in the current period in accordance with the
requirements of SFAS 150. On March 31, 2004, the Junior Subordinated Debentures were recorded at the fair value of $114,725
based on the price underlying the Trust Preferred Securities of $27.20 per share upon close of
trading on the American Stock Exchange on that date. The Company is amortizing the premium on the
Junior Subordinated Debentures of $9,279 over their remaining life in the amount of $395 per year.
At December 31, 2004, the recorded value of the Junior Subordinated Debentures, net of premium
amortization, was $114,429. The fair value of the Junior Subordinated Debentures on December 31,
2004 was $123,158 based on the $29.20 per share closing price of the underlying Trust Preferred
Securities as quoted on the American Stock Exchange. 13. Common and Preferred Stock: Common Stock issued in connection with the Merger Transaction: There are 23,141 authorized shares of Class A Common Stock, 6,212.9 of which are issued and
outstanding. Each share of Class A Common Stock entitles its holder to one vote. 48




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 13. Common and Preferred Stock (continued): Each holder of Class A Common Stock is entitled at any time to convert any or all of the
shares into an equal number of shares of Class C Common Stock. There are 2,500 authorized shares of Class B Common Stock, 1,000 of which are issued and
outstanding. Holders of Class B Common Stock have no voting rights. The Class B Common Stock was
issued to certain members of the Companys management and is subject to vesting over five years
with 20% vesting on each anniversary of the Merger Transaction. In connection with the Merger Transaction, certain members of management entered into an Executive
Securities Agreement (ESA). The ESA provides for the method and terms under which management
proceeds were invested in the Company. Under the terms of the ESA, management shareholders have
the right to put their Class A Common Stock and Class B Common Stock back to the Company at fair
market value if employment is terminated for other than cause. If terminated for cause, the
management shareholders can generally put the Class A Common Stock and Class B Common Stock back to
the Company for the lower of the fair market value or cost. The SECs Accounting Series Release
No. 268, Presentation in Financial Statements of Redeemable Preferred Stock, requires certain
securities whose redemption is not in the control of the issuer to be classified outside of
permanent equity. The put feature embedded in managements Class A Common Stock and Class B Common
Stock allows redemption at the holders option under certain circumstances. Accordingly,
managements 407.6 Class A Common Stock shares and 1,000 Class B Common Stock shares have been
classified between liabilities and stockholders equity in the accompanying Consolidated Balance
Sheet. The repurchase feature of the Class B Common Stock triggers variable accounting treatment under
FASB Interpretation No. 44, Accounting For Certain Transactions involving Stock Compensation  an
interpretation of APB Opinion No. 25 (FIN 44). At December 31, 2004, the fair value of the
Class B Common Stock was equivalent to the share price and accordingly no compensation charge was
recorded for the nine months ended December 31, 2004. There are 30,109 authorized shares of Class C Common Stock, 2,787.1 of which are issued and
outstanding. Each share of Class C Common Stock entitles its holder to one vote, provided that the
aggregate voting power of Class C Common Stock (with respect to the election of directors) never
exceeds 30%. Each holder of Class C Common Stock is entitled at any time to convert any or all of
the shares into an equal number of shares of Class A Common Stock. Preferred Stock issued in connection with the Merger Transaction: The Company has 238,889 authorized shares of Class A Preferred Stock, 82,104.8 of which are issued
and outstanding and 13,450.7 of which are reserved for issuance upon the exercise of options to
purchase shares of Class A Preferred Stock. Holders of Class A Preferred Stock are not entitled to
any voting rights. Holders of Class A Preferred Stock are entitled to preferential dividends that
shall accrue on a daily basis at the rate of 11.5% per annum of the sum of the Liquidation Value
(as defined in the Certificate of Incorporation) thereof plus all accumulated and unpaid dividends
thereon. Hillman Investment Company, a subsidiary of the Company, has 166,667 authorized shares of Class A
Preferred Stock, 57,282.4 of which are issued and outstanding and 9,384.2 of which are reserved for
issuance upon the exercise of options to purchase shares of Class A Preferred Stock. Holders of
Class A Preferred Stock are not entitled to any voting rights. Holders of Class A Preferred Stock
are entitled to preferential dividends that shall accrue on a daily basis at the rate of 11.0% per
annum of the sum of the Liquidation Value (as defined in the Certificate of Incorporation) thereof
plus all accumulated and unpaid dividends thereon. 49




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 13. Common and Preferred Stock (continued): The Hillman Investment Company Class A Preferred Stock is mandatorily redeemable on March 31,
2028 and in accordance with SFAS 150 has been classified as debt in the accompanying December 31,
2004 Balance Sheet. Dividends on the mandatorily redeemable Class A Preferred Stock for the nine
months ended December 31, 2004 are included in interest expense on the accompanying Consolidated
Statements of Operations. 14. Stock Based Compensation: Stock Options: On March 30, 2004, the Company granted 1,085,116 common stock options under the SunSource Inc. 2001
Stock Incentive Plan (the 2001 Incentive Plan). The options were issued with an exercise price
below the fair market value of the common stock on the grant date. The fair value of the stock on
March 30, 2004 was $29.20 per share and the weighted average exercise price was $6.76 per share.
Compensation expense of $24,353 was recorded in the first quarter of 2004 for the excess of the
fair market value over the exercise price. Prior to the Merger Transaction, the Company had 349,641 options issued in connection with the 1998
SunSource Equity Compensation Plan (1998 Incentive Plan). The options were 100% vested and had a
weighted average strike price of $4.19 per share. In connection with the Merger Agreement, 154,641
of the 1998 Incentive Plan options and 75,714 of the 2001 Incentive Plan options were cancelled and
converted into rights to receive options to purchase 3,895.16 shares of Hillman Companies, Inc.
Class A Preferred Stock and 2,717.55 shares of Hillman Investment Company Class A Preferred Stock
(collectively the Purchased Options). The Purchased Options have a weighted average strike price
of $170.69 per share. The fair value of the Hillman Investment Company Class A Preferred Stock
options have been included with the underlying security in the accompanying Consolidated Balance
Sheets. SFAS 150 requires security instruments with a redemption date that is certain to occur to
be classified as liabilities. The Hillman Companies, Inc. Class A Preferred Stock options, which
have a March 31, 2028 expiration date, have been classified at their fair market value in the
liability section of the accompanying Consolidated Balance Sheets. To the extent the Company pays
a dividend to holders of the Class A Preferred Stock and the Hillman Investment Company Class A
Preferred Stock, the Purchased Option Holder will be entitled to receive an amount equal to the
dividend which would have been paid if the Purchased Options had been exercised on the date
immediately prior to the record date for the dividend. Dividends on the Purchased Options are
recorded as interest expense in the accompanying Consolidated Statement of Operations.
Additionally, under the terms of the ESA, the Purchased Options can be put back to the Company at
fair market value if employment is terminated. SFAS 150 requires the initial and subsequent valuations of the Purchased Options be measured at
fair value with the change in fair value recognized as interest expense. The remaining 1998 Incentive Plan Options and 2001 Incentive Plan Options were cancelled and
converted into rights to receive a pro rata share of the merger consideration. The 1998 Incentive
Plan and the 2001 Incentive Plan were then terminated. On March 31, 2004, the Company adopted the 2004 Stock Option Plan (Common Option Plan) following
Board and shareholder approval. Grants under the Common Option Plan will consist of non-qualified
stock options for the purchase of Class B Common Shares. The number of Class B Common Shares
authorized for issuance under the Common Option Plan is not to exceed 256.41 shares. Unless
otherwise consented to by the Board, the aggregate number of Class B Common Shares for which
options may be granted under the Common Option Plan cannot exceed 51.28 in any one calendar year. 50




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##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 14. Stock Based Compensation (continued): The Common Option Plan is administered by a Committee of the Board. The Committee determines
the term of each option, provided that the exercise period may not exceed ten years from date of
grant. On December 14, 2004, options to purchase 10 shares of Class B Common Shares were granted
at a strike price of $1,000 per share to certain members of the Companys Board of Directors.
Management has determined that SFAS 123 has no impact on net income and stockholders equity of the
Company as of and for the nine month period ended December 31, 2004. On March 31, 2004, certain members of the Companys management were granted options to purchase
9,555.5 shares of Class A Preferred Stock and 6,666.7 shares of Hillman Investment Company Class A
Preferred Stock (collectively the Preferred Options). The Preferred Options were granted with an
exercise price of $1,000 per share which was equal to the value of the underlying Preferred Stock.
The Preferred Options vest over five years with 20% vesting on each anniversary of the Merger
Transaction. Holders of the Preferred Options are entitled to accrued dividends as if the
underlying Preferred Stock were issued and outstanding as of the grant date. Upon resignation from the Company after the third anniversary of grant, termination by the Company
without Cause, death or disability, or retirement at age 61 the holder of the Preferred Options has
a put right on the vested securities at a price equal to fair market value less any option exercise
price payable. FIN 44 requires variable accounting treatment for stock awards with employee
repurchase rights. Under APB Opinion 25, compensation expense is recognized to the extent the
market value of the underlying security on the measurement date exceeds the cost to the employee.
The market value on the Preferred Options increases by the amount of dividends accrued on the
underlying Preferred Stock. Compensation expense will be recognized over the five-year vesting
period in accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans  an interpretation of APB Opinions No. 15 and 25 (FIN
28). Accordingly, the Company has recorded a compensation charge of $272 in the accompanying
Consolidated Statements of Operations for the nine months ended December 31, 2004. 15. Retirement Benefits: Certain employees of the Company are covered under a profit-sharing and retirement savings
plan (defined contribution plan). The plan provides for a matching contribution for eligible
employees of 50% of each dollar contributed by the employee up to 6% of employees compensation.
In addition, the plan provides an annual contribution in amounts authorized by the Board, subject
to the terms and conditions of the plan. In April 2002, the Company made the final distribution of the assets of a defined benefit plan for
a discontinued subsidiary. The defined benefit plan was terminated in 2001 prior to the sale of the
subsidiary. Other income for the year ended December 31, 2002 includes a favorable income
adjustment of $1,231 resulting from final settlement of this defined benefit plan. 51




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 15. Retirement Benefits (continued): Costs (income) charged to operations under all retirement benefit plans for the three years
ended December 31, 2004 was as follows: Successor
    
    
    Predecessor
    
    
    Predecessor
    
    
    PredecessorNine months
    
    
    Three months
    
    
    Year
    
    
    Yearended
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2004
    
    
    2003
    
    
    2002Defined contribution plans
    
    $
    1,759
    
    
    $
    406
    
    
    $
    827
    
    
    $
    1,905Defined benefit plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,231
    )Total
    
    $
    1,759
    
    
    $
    406
    
    
    $
    827
    
    
    $
    674
 16. NonRecurring Expense: In the quarter ended March 31, 2004, the Company incurred $30,707 of non-recurring, one-time
charges. The charges included a $24,353 expense for stock options granted in connection with the
Merger Transaction at an exercise price below fair market value. See Note 13, Common and Preferred
Stock, for additional details. Payroll taxes on the stock option grant of $397 were also recorded
in the first quarter of 2004. In addition, the Company recorded Merger Transaction costs incurred
by the selling stockholders which consisted primarily of investment banking and legal fees of
$4,035. Finally, in connection with the Merger Transaction, the Company awarded bonuses to certain
members of management totaling $1,922. 17. Derivatives and Hedging: The Company uses derivative financial instruments to manage its exposures to interest rate
fluctuations on its floating rate senior debt. The derivative instruments are accounted for
pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS
133) as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities. As amended, SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet, measure those instruments at fair value and
recognize changes in the fair value of derivatives in earnings in the period of change unless the
derivative qualifies as an effective hedge that offsets certain exposures. On April 28, 2004, the Company entered into an Interest Rate Swap Agreement (Swap) with a
two-year term for a notional amount of $50,000. The Swap fixes the interest rate on $50,000 of the
Senior Term Loan at a rate of 1.17% plus the applicable interest rate margin for the first three
months of the Swap with incremental increases ranging from 28 to 47 basis points in each successive
quarter. The Swap has been designated as a cash flow hedge and the fair value at December 31, 2004 was
($18), net of $12 in tax benefit. The Swap is reported on the consolidated balance sheet in other
non-current liabilities. The related deferred loss on our swap agreements of $18 has been deferred
in shareholders equity as a component of other comprehensive loss. This deferred loss is then
recognized as an adjustment to interest expense over the same period in which the related interest
payments being hedged are recorded in interest expense. 52




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 18. Commitments and Contingencies: The Company self insures its product liability, workers compensation and general liability
losses up to $250 per occurrence. Catastrophic coverage is maintained for occurrences in excess of
$250 up to $35,000. As of December 31, 2004, the Company has provided insurers letters of credit
aggregating $5,548 related to its product liability, workers compensation and general liability
coverage. The Company self insures its group health claims up to an annual stop loss limit of $125 per
participant. Aggregate coverage is maintained for annual group health insurance claims in excess
of 125% of expected claims. Provisions for losses expected under these programs are recorded based on an analysis of historical
insurance claim data and certain actuarial assumptions. Legal proceedings are pending which are either in the ordinary course of business or incidental to
the Companys business. Those legal proceedings incidental to the business of the Company are
generally not covered by insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material adverse effect on the
consolidated financial position, operations or cash flows of the Company. 19. Statements of Cash Flows: Supplemental disclosures of cash flow information are presented below: Successor
    
    
    
    PredecessorNine Months
    
    
    
    Three Months
    
    
    Year
    
    
    Yearended
    
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    
    2004
    
    
    2003
    
    
    2002Cash paid (refunded) during the
period for:Interest on junior subordinated
debentures
    
    $
    9,173
    
    
    
    $
    3,058
    
    
    $
    
    
    
    $
    Distributions on guaranteed
preferred beneficial interests
    
    $
    
    
    
    
    $
    
    
    
    $
    12,231
    
    
    $
    12,231Interest
    
    $
    8,992
    
    
    
    $
    4,038
    
    
    $
    12,318
    
    
    $
    10,065Income taxes
    
    $
    22
    
    
    
    $
    48
    
    
    $
    338
    
    
    $
    (179
    )Cash investing activities:Acquisitions (see Note 4, Acquisitions
and Divestitures):Fair value of assets acquired,
including goodwill
    
    $
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,592Cash paid for acquired businesses
    
    $
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,592Non-cash investing activities:Exchange of G-C interest for
subordinated G-C note (Note 4)
    
    $
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,000Non-cash financing activities:Dividends on preferred stock (Note 13)
    
    $
    7,321
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 53




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 20. Quarterly Data (unaudited): 2004
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstNet sales
    
    $
    82,541
    
    
    $
    97,463
    
    
    $
    92,636
    
    
    $
    78,997Gross profit
    
    
    45,387
    
    
    
    53,505
    
    
    
    51,030
    
    
    
    43,217Net income (loss)
    
    
    (1,274
    )
    
    
    1,690
    
    
    
    211
    
    
    
    (19,316
    )
 2003
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstNet sales
    
    $
    78,134
    
    
    $
    86,055
    
    
    $
    84,263
    
    
    $
    69,989Gross profit
    
    
    43,136
    
    
    
    47,237
    
    
    
    45,973
    
    
    
    38,325Net income (loss)
    
    
    (2,100
    )
    
    
    1,720
    
    
    
    1,578
    
    
    
    (5,845
    )
 21. Concentration of Credit Risks: Financial instruments which potentially subject the Company to concentration of credit risk
consist principally of cash and cash equivalents and trade receivables. The Company places its
cash and cash equivalents with high credit quality financial institutions. Concentrations of
credit risk with respect to sales and trade receivables are limited due to the large number of
customers comprising the Companys customer base and their dispersion across geographic areas. The
Company performs periodic credit evaluations of its customers financial condition and generally
does not require collateral. For the year ended December 31, 2004, the largest three customers
accounted for 38.2% of sales and 42.9% of the year-end accounts receivable balance. No other
customer accounted for more than 10% of the Companys total sales in 2004. Concentration of credit risk with respect to purchases and trade payables are limited due to the
large number of vendors comprising the Companys vendor base, with dispersion across different
industries and geographic areas. The Companys largest vendor in terms of annual purchases
accounted for 10.4% of the Companys total purchases and 7.0% of the Companys total trade payables
on December 31, 2004. 54




---



##### 



THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands) 22. Segment Information: The following geographic area data includes revenue based on product shipment destination and
plant and equipment based on physical location: Successor
    
    
    PredecessorNine Months
    
    
    Three Months
    
    
    Year
    
    
    YearEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedDecember 31,
    
    
    March 31,
    
    

    December 31,
    
    
    December 31,2004
    
    
    2004
    
    
    2003
    
    
    2002Net salesUnited States
    
    $
    266,175
    
    
    $
    77,520
    
    
    $
    312,396
    
    
    $
    281,742Canada
    
    
    2,296
    
    
    
    314
    
    
    
    1,491
    
    
    
    1,217Mexico
    
    
    895
    
    
    
    116
    
    
    
    973
    
    
    
    725Other
    
    
    3,274
    
    
    
    1,047
    
    
    
    3,581
    
    
    
    3,104Consolidated net sales
    
    $
    272,640
    
    
    $
    78,997
    
    
    $
    318,441
    
    
    $
    286,788Plant & equipment:United States
    
    $
    61,055
    
    
    $
    63,372
    
    
    $
    64,550
    
    
    $
    68,546Canada
    
    
    56
    
    
    
    45
    
    
    
    51
    
    
    
    50Mexico
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated plant & equip.
    
    $
    61,111
    
    
    $
    63,417
    
    
    $
    64,601
    
    
    $
    68,596
 55




---



##### 



Financial Statement Schedule: Schedule II  VALUATION ACCOUNTS (dollars in thousands) Deducted From Assets in Balance SheetAllowance forAllowance for
    
    
    Obsolete/Doubtful
    
    
    ExcessAccounts
    
    
    InventoryBalance, December 31, 2001 - Predecessor
    
    
    537
    
    
    
    3,927Additions charged to cost and expense
    
    
    277
    
    
    
    654Additions for DIY Acquisition
    
    
    100
    
    
    
    1,419Deductions due to:Others
    
    
    359
    (A)
    
    
    1,625
    (A)Ending
Balance - December 31, 2002 - Predecessor
    
    
    555
    
    
    
    4,375Additions charged to cost and expense
    
    
    63
    
    
    
    697Deductions due to:Others
    
    
    94
    (A)
    
    
    1,883
    (A)Balance, December 31, 2003 - Predecessor
    
    
    524
    
    
    
    3,189Additions charged to cost and expense
    
    
    31
    
    
    
    500Deductions due to:Others
    
    
    31
    (A)
    
    
    215
    (A)Ending
Balance - March 31, 2004 - Predecessor
    
    
    524
    
    
    
    3,474Additions charged to cost and expense
    
    
    198
    
    
    
    397Deductions due to:Others
    
    
    196
    (A)
    
    
    313
    (A)Ending
Balance - December 31, 2004 - Successor
    
    $
    526
    
    
    $
    3,558
 Notes:  (A)
    Includes write-off of accounts receivable (net of bad debt recoveries)
and inventories. 56




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##### 



Item 9 
    Changes in and Disagreements on Accounting and Financial Disclosure. There were no changes in or disagreements on accounting and financial disclosure during the
year ended December 31, 2004. Item 9A  Controls and Procedures (a) As of the end of the period covered by this annual report on Form 10-K, in accordance with
Rule 13a-15 of the Securities Exchange Act of 1934, as amended, the Companys management, with
participation of the Companys chief executive officer and chief financial officer, conducted an
evaluation of the Companys disclosure controls and procedures (as such term is defined in Rules
13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended). Based upon this evaluation,
the Companys chief executive officer and chief financial officer concluded that the Companys
disclosure controls and procedures are effective
in ensuring that information required to be disclosed in our reports
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms and

 in timely alerting them of any material
information relating to the Company that is required to be disclosed by the Company in the reports
it files or submits under the Securities Exchange Act of 1934, as amended. (b) There have been no changes in the Companys internal control over financial reporting that
occurred during the year ended December 31, 2004, that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting. Item 9B  Other Information None 57




---



##### 



PART III Item 10  Directors and Executive Officers of the Registrant. The following is a summary of the biographies for at least the last five years of the
continuing directors and officers. Each of the directors has served as such since March 31, 2004
except for Maurice P. Andrien, Jr. and Max W. Hillman who have served since September 2001. Directors Principal Occupation; Five-YearName and Age
    
    Employment; Other DirectorshipsPeter M. Gotsch (40)
    
    Chairman of The Hillman Companies, Inc. since
March 31, 2004. Mr. Gotsch has been a member
of Code Hennessy & Simmons LLC since 1997 and
employed by its affiliates since 1989. Mr.
Gotsch presently serves on the Board of
Beacon Roofing Supply, Inc.Maurice P. Andrien, Jr. (63)
    
    From September 2001 to March 2004 Mr. Andrien
was Chairman of The Hillman Companies, Inc.,
Cincinnati, Ohio. From April 1999 to
November 2001 Mr. Andrien was President and
Chief Executive Officer of SunSource Inc.
From June 1998 to April 1999, Mr. Andrien was
President and Chief Operating Officer of
Unican Security Systems, Ltd., Montreal,
Quebec, Canada.Max W. Hillman (58)
    
    President and Chief Executive Officer of The
Hillman Companies, Inc., Chief Executive
Officer of The Hillman Group, Inc.,
Cincinnati, Ohio. From April 2000 to
November 2001, Mr. Hillman was Co-Chief
Executive Officer of The Hillman Group, Inc.
From 1999 to April 2000, Mr. Hillman held the
position of Chief Executive Officer of The
Hillman Group, Inc. From 1991 to 1999, Mr.
Hillman was a Group Vice President for
SunSource Inc.Andrew W. Code (46)
    
    Mr. Code has been a general partner of CHS
Management Limited Partnership (CHS
Management) and a general partner of Code,
Hennessy & Simmons Limited Partnership
(CHS) since August 1988. Mr. Code is on the
Board of SCP Pool Company.Mark A. Dolfato (32)
    
    Mr. Dolfato joined Code Hennessy & Simmons
LLC as an Associate in 2000 and has been a
Vice President since 2003.
 58




---



##### 



Principal Occupation; Five-YearName and Age
    
    Employment; Other DirectorshipsLarry Wilton (57)
    
    Mr. Wilton has been CEO of Compass Home Inc. since
2004. From 1998 to 2002 Mr. Wilton was CEO of
Philips Lamps NAFTA. From 1996 to 1998 Mr. Wilton
was Executive Vice President of Philips Lighting
United States and Canada. From 1999 to 2002 Mr.
Wilton served on the Philips NV Lamps Board of
Directors.J. Mark MacDonald (49)
    
    J. Mark MacDonald is Vice President, Teachers
Private Capital, Ontario Teachers Pension Plan
Board. Mr. MacDonald joined Teachers Private
Capital, OTPPB in 1995. Mr. MacDonald is also a
director of Trimac Transportation Services Inc.,
Osprey Media Group Inc., The Hillman Group, Inc.,
Young America Holdings Inc. and previously served
on the board of directors of Sun Media Corporation,
Q/Media Services Limited, AT&T Canada/MetroNet
Communications Corporation, and TCT Logistics Inc.
 All directors hold office until their successors are duly elected and qualified. 59




---



##### 



Committees The Company is a controlled company within the meaning of the American Stock Exchange (Amex)
listing standards because an affiliate of CHS owns more than 50% of the outstanding shares of the
Companys common voting stock. Accordingly, the Company is exempt from the requirements of the
Amex listing standards to maintain a majority of independent directors on the Companys board of
directors and to have a nominating committee and a compensation committee composed entirely of
independent directors. The Company does not have a nominating committee, but it does have a compensation committee. The
board of directors believes that it is not necessary to utilize a nominating committee. Director
nominees for the Company are selected by the board of directors following receipt of
recommendations of potential candidates from the Chairman of the Board of the Company. The board
is not limited by the recommendation of the Chairman and may select other nominees. There is no
charter setting forth these procedures and the board of directors has no policy regarding the
consideration of any director candidates recommended by shareholders. The current members of the
audit committee are Peter Gotsch, Mark Dolfato and J. Mark MacDonald.
No member of the audit committee is designated as an audit committee financial expert. Code of Ethics The Company has adopted a code of ethics which applies to, among others, its senior officers,
including its Chief Executive Officer and its Chief Financial Officer, as well as every employee of
the Company. The Companys code can be accessed via its website at http://www.hillmangroup.com.
The Company intends to disclose amendments to or waivers from a required provision of the code on
Form 
8-K. 60




---



##### 



The executive officers of the Company (including the executive officers of The Hillman Group,
Inc.) are set forth below: Executive Officers Name and Age
    
    Position with the Company;
Five-year Employment HistoryMax W. Hillman (58)
    
    President and Chief Executive Officer of The
Hillman Companies, Inc., Chief Executive Officer
of The Hillman Group, Inc., Cincinnati, Ohio. See
page 58 for five-year employment history. Mr.
Hillman is the brother of Richard P. Hillman.Richard P. Hillman (56)
    
    President of The Hillman Group, Inc., Cincinnati,
Ohio. Mr. Hillman has held such position since
1991. Mr. Hillman is the brother of Max W.
Hillman.James P. Waters (43)
    
    Chief Financial Officer and Secretary of The
Hillman Companies, Inc., Cincinnati, Ohio and Vice
President, Chief Financial Officer and Secretary
of The Hillman Group, Inc., Cincinnati, Ohio.
From September 1999 to November 2001, Mr. Waters
was Vice President and Chief Financial Officer of
The Hillman Group, Inc. From November 1997 to
September 1999, Mr. Waters was Vice President of
Finance for Curtis Industries, Inc., Mayfield
Heights, Ohio.George L. Heredia (46)
    
    Senior Vice President of Engraving for The Hillman
Group, Inc., Tempe, Arizona. Mr. Heredia has held
various executive positions since April 2000.
Prior to April 2000, Mr. Heredia has held the
positions of Senior Vice President of Marketing
and Senior Vice President of Operations for Axxess
Technologies Inc.Terry R. Rowe (50)
    
    Senior Vice President of National Account Sales
for The Hillman Group, Inc., Cincinnati, Ohio.
Mr. Rowe has held such position with The Hillman
Group since 1992.
 All executive officers hold office at the pleasure of the board of directors. 61




---



##### 



Item 11  Executive Compensation Compensation of Executive Officers The following table sets forth all cash compensation paid and accrued for services rendered during
the three years ended December 31, 2004, by each of the Chief Executive Officer, and the four other
most highly compensated executive officers of the Company and its subsidiaries whose remuneration
exceeded $100,000. Long-Term CompensationOther
    
    
    Restricted
    
    
    SecuritiesAnnual
    
    
    Stock
    
    
    Underlying
    
    
    LTIP
    
    
    All OtherName and
    
    Annual Compensation
    
    
    Compen-
    
    
    Awards
    
    
    Options
    
    
    Payouts
    
    
    Compen-Principal Position
    
    Year
    
    
    Salary(1)
    
    
    Bonus(2)
    
    
    sation
    
    
    $
    
    
    #
    
    
    $
    
    
    sationMax W. Hillman
    
    
    2004
    
    
    
    397,500
    
    
    
    345,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353,353
    (4)President and CEO
    
    
    2003
    
    
    
    363,270
    
    
    
    162,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,407
    (9)The Hillman Companies, Inc.
    
    
    2002
    
    
    
    362,500
    
    
    
    293,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,200
    (9)Richard P. Hillman
    
    
    2004
    
    
    
    260,885
    
    
    
    115,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,414
    (5)President
    
    
    2003
    
    
    
    244,813
    
    
    
    50,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,082
    (9)The Hillman Group, Inc.
    
    
    2002
    
    
    
    234,423
    
    
    
    105,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,735
    (9)George L. Heredia
    
    
    2004
    
    
    
    220,846
    
    
    
    72,668
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,905
    (6)Senior VP of Engraving
    
    
    2003
    
    
    
    193,192
    
    
    
    235,724
    (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,899
    (9)The Hillman Group, Inc.
    
    
    2002
    
    
    
    193,992
    
    
    
    152,968
    (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,644
    (9)Terry R. Rowe
    
    
    2004
    
    
    
    202,846
    
    
    
    57,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,895
    (7)Senior VP National Accounts
    
    
    2003
    
    
    
    189,000
    
    
    
    54,858
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,654
    (9)The Hillman Group, Inc.
    
    
    2002
    
    
    
    182,000
    
    
    
    64,715
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,226
    (9)James P. Waters
    
    
    2004
    
    
    
    185,954
    
    
    
    73,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,145
    (8)CFO and Secretary
    
    
    2003
    
    
    
    170,838
    
    
    
    35,738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,427
    (9)The Hillman Companies, Inc.
    
    
    2002
    
    
    
    163,269
    
    
    
    55,845
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,419
    (9)
   (1)
    
    Represents base salary plus other types of miscellaneous compensation.(2)
    
    Represents earned bonus for services rendered in each year.(3)
    
    Includes special performance and retention bonuses of $186,000 and $85,000 earned
in 2003 and 2002, respectively, related to the acquisition of Axxess Technologies, Inc.(4)
    
    Represents a discretionary management bonus paid in connection with the CHS
acquisition of $345,159, 401(k) employer matching contributions of $5,694 and deferred
compensation matching contributions of $2,500.(5)
    
    Represents a discretionary management bonus paid in connection with the CHS
acquisition of $113,000, 401(k) employer matching contributions of $6,884 and deferred
compensation matching contributions of $2,500.(6)
    
    Represents a discretionary management bonus paid in connection with the CHS
acquisition of $48,550, 401(k) employer matching contributions of $6,856 and deferred
compensation matching contributions of $2,500.(7)
    
    Represents a discretionary management bonus paid in connection with the CHS
acquisition of $49,308 and a 401(k) employer matching contributions of $6,587.(8)
    
    Represents a discretionary management bonus paid in connection with the CHS
acquisition of $49,308, 401(k) employer matching contributions of $6,337 and deferred
compensation matching contributions of $2,500.(9)
    
    Represents employer matching contributions in the Companys 401(k) and deferred
compensation plans. 62




---



##### 



Maurice P. Andrien, Jr. and Larry Wilton are entitled to receive $4,000 for each Board meeting
attended and an annual Board fee of $5,000. Mr. Andrien and Mr. Wilton each received $21,000 cash
compensation for the year ended December 31, 2004 for their Board of Director duties. The
remaining Board of Directors were not compensated by the Company during the year ended December 31,
2004. In addition to cash compensation, Mr. Wilton and Mr. Andrien were granted 5 shares each of Class B
Common Shares. There were no other common stock options outstanding as of December 31, 2004. Option Grants in the Last Fiscal Year The following table sets forth information with respect to the options granted by the Company
during the 2004 fiscal year to the named executive officers: Number of
    
    
    Percent ofSecurities
    
    
    Total OptionsUnderlying
    
    
    Granted to
    
    
    Exercise or
    
    
    
    
    
    
    GrantOptions
    
    
    Employees in
    
    
    Base Price
    
    
    Expiration
    
    
    DateName
    
    Granted
    
    
    Fiscal Year
    
    
    ($/Sh)
    
    
    Date
    
    
    ValueMax W. HillmanCommon Stock (1)
    
    
    267,463
    
    
    
    24.6
    %
    
    $
    6.39
    
    
    
    3/31/2004
    
    
    $
    7,809,920Class A Preferred (2)
    
    
    3,244
    
    
    
    33.9
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    949,499Class A Preferred  Subsidiary (3)
    
    
    2,263
    
    
    
    33.9
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    629,114Richard P. HillmanCommon Stock (1)
    
    
    66,866
    
    
    
    6.2
    %
    
    $
    6.39
    
    
    
    3/31/2004
    
    
    $
    1,952,487Class A Preferred (2)
    
    
    1,388
    
    
    
    14.5
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    406,280Class A Preferred  Subsidiary (3)
    
    
    968
    
    
    
    14.5
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    269,187George L. HerediaCommon Stock (1)
    
    
    44,577
    
    
    
    4.1
    %
    
    $
    6.39
    
    
    
    3/31/2004
    
    
    $
    1,301,648Class A Preferred (2)
    
    
    715
    
    
    
    7.5
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    209,390Class A Preferred  Subsidiary (3)
    
    
    497
    
    
    
    7.5
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    138,138Terry R. RoweCommon Stock (1)
    
    
    44,577
    
    
    
    4.1
    %
    
    $
    6.39
    
    
    
    3/31/2004
    
    
    $
    1,301,648Class A Preferred (2)
    
    
    682
    
    
    
    7.1
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    199,730Class A Preferred  Subsidiary (3)
    
    
    476
    
    
    
    7.1
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    132,328James P. WatersCommon Stock (1)
    
    
    44,577
    
    
    
    4.1
    %
    
    $
    6.39
    
    
    
    3/31/2004
    
    
    $
    1,301,648Class A Preferred (2)
    
    
    648
    
    
    
    6.8
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    189,748Class A Preferred  Subsidiary (3)
    
    
    452
    
    
    
    6.8
    %
    
    $
    1,000.00
    
    
    
    3/31/2014
    
    
    $
    125,712
   (1)
    
    Common stock options granted on March 30, 2004 under the SunSource Inc. 2001 Stock
Incentive Plan. The options were issued with an exercise price below the fair market
value on the grant date of $29.20 per share. The SunSource Inc. 2001 Stock Incentive
Plan was terminated on March 31, 2004 in connection with the CHS acquisition.(2)
    
    Options to purchase The Companys Class A Preferred Stock were granted on March
31, 2004 in connection with the CHS acquisition under the terms of an Executive
Securities Agreement between the Company and the shareholder. The grant date value is
based on an third party appraisal as of March 31, 2004.(3)
    
    Options to purchase The Hillman Investment Company Class A Preferred Stock were
granted on March 31, 2004 in connection with the CHS acquisition under the terms of an
Executive Securities Agreement between the Company and the shareholder. The grant date
value is based on an third party appraisal as of March 31, 2004. 63




---



##### 



Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth certain information regarding the options exercised by the
named executives during the last fiscal year and the number and value of unexercised options held
by the named executives at December 31, 2004: Number of Securities
    
    
    Value ofNumber of
    
    
    
    
    
    
    Underlying Unexercised
    
    
    UnexercisedSecurities
    
    
    
    
    
    
    Options at
    
    
    In the Money OptionsUnderlying
    
    
    
    
    
    
    Fiscal Year End (#)
    
    
    at Fiscal Year End ($)Options
    
    
    Value
    
    
    Exercisable/
    
    
    Exercisable/Name
    
    Exercised
    
    
    Realized (1)
    
    
    Unexercisable
    
    
    Unexercisable (3)Max W. HillmanCommon Stock (2)
    
    
    334,963
    
    
    $
    7,796,519
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Class A Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,244
    
    
    $
    
    
    
    
    288,680Class A Preferred  Subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,263
    
    
    $
    
    
    
    
    192,355Richard P. HillmanCommon Stock (2)
    
    
    86,866
    
    
    $
    2,024,213
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Class A Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,388
    
    
    $
    
    
    
    
    123,523Class A Preferred  Subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    968
    
    
    $
    
    
    
    
    82,306George L. HerediaCommon Stock (2)
    
    
    51,218
    
    
    $
    1,177,093
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Class A Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    715
    
    
    $
    
    
    
    
    63,662Class A Preferred  Subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    497
    
    
    $
    
    
    
    
    42,237Terry R. RoweCommon Stock (2)
    
    
    53,577
    
    
    $
    1,241,601
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Class A Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    682
    
    
    $
    
    
    
    
    60,725Class A Preferred  Subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    476
    
    
    $
    
    
    
    
    40,460James P. WatersCommon Stock (2)
    
    
    53,577
    
    
    $
    1,241,601
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Class A Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    648
    
    
    $
    
    
    
    
    57,690Class A Preferred  Subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    $
    
    
    
    
    38,437
   (1)
    
    Represents the market value, as of the exercise date, of the options when the same
were cashed out, less the aggregate option exercise price.(2)
    
    In connection with the CHS Merger Transaction, options issued under the 1998
SunSource Equity Compensation Plan and the SunSource Inc. 2001 Stock Incentive Plan were
cancelled and converted into rights to receive a pro rata share of the merger
consideration or an option to purchase shares of the Companys Class A Preferred Stock
and The Hillman Investment Company Class A Preferred Stock. The 1998 SunSource Equity
Compensation Plan and the SunSource Inc. 2001 Stock Incentive Plan were then terminated.(3)
    
    There is no public market for the securities underlying the Companys Class A
Preferred and The Hillman Investment Company Inc. Class A Preferred Options. The value
of the Preferred Options is based on dividends accrued on the underlying Preferred
Stock. 64




---



##### 



Employment Contracts, Termination of Employment and Change-in-Control Arrangements Upon a change in control of the Companys Nonqualified Deferred Compensation Plan (the Deferred
Compensation Plan), payment would be provided for all amounts, including accrued investment
earnings. Compensation of the President and Chief Executive Officer of the Company Max W. Hillman entered into a four-year employment agreement with the Company effective as of the
merger with CHS on March 31, 2004, which term will renew on a year-to-year basis after the initial
term, unless this agreement is terminated earlier or not renewed. The agreement provides for an
annual base salary of $365,000, 2004 bonus compensation in accordance with performance targets
established in January, 2004, and subsequent annual bonuses of up to 124% of base salary for the
remainder of the term, subject to performance in accordance with performance criteria determined by
the board each calendar year. During the term, Mr. Hillman will be eligible to participate in the
Companys 401(k) Plan and Deferred Compensation Plan. Mr. Hillmans employment agreement contains
non-compete and non-solicitation covenants for two years following termination of employment with
the Company. If Mr. Hillman is terminated without cause or if he resigns with good reason in the
absence of a change in control involving the Company, then the agreement requires the Company to
pay Mr. Hillman his normal base salary and bonus compensation for a period of two years following
the termination date. If the company should undergo a change in control after the third
anniversary of the employment agreement, Mr. Hillman will receive the lump sum equivalent of one
years base compensation and 50% of his average bonus during the prior three years. Compensation of the President of The Hillman Group, Inc. Richard P. Hillman entered into a three-year employment agreement with the Company effective as of
the merger with CHS on March 31, 2004, which term will renew on a year-to-year basis after the
initial term, unless this agreement is terminated earlier or not renewed. The agreement provides
for an annual base salary of $252,000, 2004 bonus compensation in accordance with performance
targets established in January, 2004, and subsequent annual bonuses of up to 70% of base salary for
the remainder of the term, subject to performance in accordance with performance criteria
determined by the board each calendar year. During the term, Mr. Hillman will be eligible to
participate in the Companys 401(k) Plan and Deferred Compensation Plan. Mr. Hillmans employment agreement contains
non-compete and non-solicitation covenants for two years following termination of employment with
the Company. If Mr. Hillman is terminated without cause or if he resigns with good reason in the
absence of a change in control involving the Company, then the agreement requires the Company to
pay Mr. Hillman his normal base salary and bonus compensation for a period of two years following
the termination date. If the company should undergo a change in control after the third
anniversary of the employment agreement, Mr. Hillman will receive the lump sum equivalent of one
years base compensation and 50% of his average bonus during the prior three years. Compensation of the Chief Financial Officer of the Company James P. Waters entered into a two-year employment agreement with the Company effective as of the
merger with CHS on March 31, 2004, which term will renew on a year-to-year basis after the initial
term, unless this agreement is terminated earlier or not renewed. The agreement provides for an
annual base salary of $180,000, 2004 bonus compensation in accordance with performance targets
established in January, 2004, and subsequent annual bonuses of up to 60% of base salary for the
remainder of the term, subject to performance in accordance with performance criteria determined by
the board each calendar year. During the term, Mr. Waters will be eligible to participate in the
Companys 401(k) Plan and Deferred Compensation Plan. Mr. Waters employment agreement contains
non-compete and non-solicitation covenants for two years following termination of employment with
the Company. If Mr. Waters is terminated without cause or if he resigns with good reason in the
absence 65




---



##### 



of a change in control involving the Company, then the agreement requires the Company to
pay Mr. Waters his normal base salary and bonus compensation for a period of two years following
the termination date. If the company should undergo a change in control after the third
anniversary of the employment agreement, Mr. Waters will receive the lump sum equivalent of one
years base compensation and 50% of his average bonus during the prior three years. In connection with the CHS Merger, Max W. Hillman, Richard P. Hillman, James P. Waters, Terry R.
Rowe and George L. Heredia entered into an Executive Securities Agreement (ESA). The ESA sets
forth the terms under which the named executive may purchase, exchange or cancel the Companys
equity securities. In addition, the ESA is the grant instrument for The Companys Class A
Preferred Options and The Hillman Investment Company Class A Preferred Options (Preferred
Options). The Preferred Options vest 20% per year over a five year period and expire on March 31,
2014. Under the terms of the ESA, if employment is terminated for other than cause the security
holder has the option to put the security or vested portion of the Preferred Options back to the
Company at fair market value. If terminated for cause, securities can be put back to the Company
at the lower of cost or fair market value. The Company also has the option to call the securities
if employment is terminated. 66




---



##### 



Item 12  Security Ownership of Certain Beneficial Owners and Management. The following table shows the number of shares of the Companys securities beneficially owned
as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
by each executive officer and director and all executive officers and directors as a group and
persons beneficially owning more than 5% of any one class of the Companys securities. Unless
otherwise set forth below, the address for each of the beneficial owners is 10590 Hamilton Ave.,
Cincinnati, Ohio 45231. Class A Common
    
    
    Class B Common
    
    
    Class C Common
    
    
    
    
    
    
    
    
    
    
    Class A PreferredName
    
    Stock (1)
    
    
    Stock (2)
    
    
    Stock (3)
    
    
    Total Common Stock (4)
    
    
    Stock (5)5% Owners
    
    Shares
    
    
    Percent
    
    
    Shares
    
    
    Percent
    
    
    Shares
    
    
    Percent
    
    
    Shares
    
    
    Percent
    
    
    Shares
    
    
    PercentCode Hennessy &
Simmons IV LP
10 South Wacker Dr.
Suite 3175
Chicago, IL 60606
    
    
    4,904.9
    
    
    
    78.95
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,904.9
    
    
    
    49.05
    %
    
    
    46,869.4
    
    
    
    49.05
    %Ontario Teachers
Pension Plan
5650 Yonge St.
North York, Ontario
M2M 4H5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,787.1
    
    
    
    100.00
    %
    
    
    2,787.1
    
    
    
    27.87
    %
    
    
    26,632.3
    
    
    
    27.87
    %HarbourVest Partners
VI  Direct Fund,
L.P.
One Financial Center
44th Floor
Boston, MA 02111
    
    
    871.0
    
    
    
    14.02
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    871.0
    
    
    
    8.71
    %
    
    
    8,322.6
    
    
    
    8.71
    %Directors and
Executive OfficersMax W. Hillman
    
    
    166.4
    
    
    
    2.68
    %
    
    
    343.4
    
    
    
    34.34
    %
    
    
    
    
    
    
    
    
    
    
    509.8
    
    
    
    5.10
    %
    
    
    4,565.9
    
    
    
    4.78
    %(6)Richard P. Hillman
    
    
    54.6
    
    
    
    .88
    %
    
    
    144.6
    
    
    
    14.46
    %
    
    
    
    
    
    
    
    
    
    
    199.2
    
    
    
    1.99
    %
    
    
    1,953.7
    
    
    
    2.04
    %(7)George L. Heredia
    
    
    23.3
    
    
    
    .38
    %
    
    
    73.9
    
    
    
    7.39
    %
    
    
    
    
    
    
    
    
    
    
    97.2
    
    
    
    .97
    %
    
    
    1,007.8
    
    
    
    1.05
    %(8)Terry R. Rowe
    
    
    23.9
    
    
    
    .38
    %
    
    
    70.6
    
    
    
    7.07
    %
    
    
    
    
    
    
    
    
    
    
    94.5
    
    
    
    .95
    %
    
    
    960.4
    
    
    
    1.01
    %(9)James P. Waters
    
    
    23.9
    
    
    
    .38
    %
    
    
    67.3
    
    
    
    6.73
    %
    
    
    
    
    
    
    
    
    
    
    91.2
    
    
    
    .91
    %
    
    
    912.4
    
    
    
    .95
    %(10)All Directors and
Executive Officers
as a Group
    
    
    407.6
    
    
    
    6.56
    %
    
    
    1,000.0
    
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    1,407.6
    
    
    
    14.08
    %
    
    
    13,450.7
    
    
    
    14.08
    %
   (1)
    Each holder of Class A Common Stock is entitled at any time to convert any or all of
the shares into an equal number of shares of Class C Common Stock.(2)
    Class B Common Stock has no voting rights.(3)
    Each holder of Class C Common Stock is entitled at any time to convert any or all
of the shares into an equal number of shares of Class A Common Stock. Each share of
Class C Common Stock is entitled to one vote provided that the aggregate voting power of
Class C Common Stock (with respect to the election of directors) never exceeds 30%.(4)
    Total of all classes of Common Stock(5)
    Class A Preferred shares do not have voting rights.(6)
    Includes options to purchase 3,243.7 shares of Class A Preferred stock(7)
    Includes options to purchase 1,387.9 shares of Class A Preferred stock.(8)
    Includes options to purchase 716.0 shares of Class A Preferred stock.(9)
    Includes options to purchase 682.3 shares of Class A Preferred stock.(10)
    Includes options to purchase 648.2 shares of Class A Preferred stock. 67




---



##### 



Item 13  Certain Relationships and Related Transactions. On September 26, 2001, the Company was acquired by Allied Capital pursuant to the terms and
conditions of an Agreement and Plan of Merger dated as of June 18, 2001. In connection with the
Agreement and Plan of Merger, the Company was obligated to pay management fees to a subsidiary of
Allied Capital for management services rendered in the amount of $1,800 per year, plus out of
pocket expenses, for calendar years subsequent to 2001. The Company has recorded a management fee
charge of $523,716, $1,800,000 and $1,800,000 on the Predecessors Statement of Operations for the
three months ended March 31, 2004 and the years ended December 31, 2003 and 2002, respectively.
Payment of management fees was due annually after delivery of the Companys annual audited
financial statements to the Board of Directors of the Company. The management fee for the year
ended December 31, 2002 was paid in March 2003 and the management fee for the three months ended
December 31, 2001 was paid in March 2002. The obligation to pay management fees to Allied Capital
was terminated upon the payment of outstanding fees in the amount of $2,323,716 on March 31, 2004
in connection with the close of the Merger Transaction. On March 31, 2004, the Company was acquired by an affiliate of Code Hennessy & Simmons LLC (CHS).
In connection with the CHS acquisition, the Company is obligated to pay management fees to a
subsidiary of CHS in the amount of $57,962 per month and to pay management fees to a subsidiary of
OTPP in the amount of $25,640 per month, plus out of pocket expenses, for each month commencing
with the closing date of the Merger Transaction. The Company has paid management fees and expenses
of $805,123 to CHS and OTPP for the nine month period ended December 31, 2004. The subordinated debt payable to Allied Capital and accrued interest thereon totaling $45,571,382
was paid in full at March 31, 2004 in connection with the CHS acquisition. Item 14  Principal Accounting Fees and Services. PricewaterhouseCoopers LLP,
the Companys independent registered public accounting firm, billed the Company aggregate
fees of $164,645 for the audit of the Companys annual financial statement for the fiscal year
ended December 31, 2004 and for the review of the financial statements included in the Companys
Forms 10-Q for such fiscal year and $145,000 for the audit of the Companys annual financial
statement for the fiscal year ended December 31, 2003 and for the review of the financial
statements included in the Companys Forms 10-Q for such fiscal year. The following are aggregate fees billed to the Company by PricewaterhouseCoopers LLP during 2004
and 2003: Fiscal Year Ended
    
    
    Fiscal Year EndedDecember 31, 2004
    
    
    December 31, 2003Audit Fees
    
    $
    164,645
    
    
    $
    145,000Audit Related Fees
    
    
    211,080
    
    
    
    Tax Fees
    
    
    33,150
    
    
    
    84,296All Other Fees
    
    
    
    
    
    
    Total Fees:
    
    $
    408,875
    
    
    $
    229,296
 Audit Fees Audit fees consist of fees billed for professional services rendered for the audit of the Companys
financial statements and review of the interim consolidated financial statements included in
quarterly reports and services that are normally provided by PricewaterhouseCoopers LLP in
connection with statutory and regulatory filings. 68




---



##### 



Audit Related Fees Audit related fees are fees billed for assurance and related services that are reasonably related
to the performance of the audit or review of the Companys consolidated financial statements and
are not under Audit Fees. Tax Fees Tax fees consist of fees billed for professional services for tax compliance, tax advice and tax
planning. These services include assistance regarding federal, state and international tax
compliance, tax audit defense, customs and duties, mergers and acquisitions, and international tax
planning. All Other Fees All other fees consist of fees for products and services other than the services reported above.
There were no all other fees incurred in 2004 and 2003. The Audit Committees policy is to pre-approve all audit and permissible non-audit services
provided by PricewaterhouseCoopers LLP on a case by case basis, and any pre-approval is detailed as
to the particular service or category of service and is generally subject to a specific budget.
These services may include audit services, audit-related services, tax services and other related
services. PricewaterhouseCoopers LLP and management are required to periodically report to the
Audit Committee regarding the extent of services provided by PricewaterhouseCoopers LLP in
accordance with this pre-approval policy, and the fees for the services performed to date. 69




---



##### 



PART IV Item 15 
Exhibits and Financial Statement Schedules. (a) Documents Filed as a Part of the Report:  1.
    Financial Statements.The information concerning financial statements called for by Item 15 of Form 10-K is set
forth in Part II, Item 8 of this annual report on Form 10-K.2.
    Financial Statement Schedules.The information concerning financial statement schedules called for by Item 15 of Form 10-K
is set forth in Part II, Item 8 of this annual report on Form 10-K.3.
    Reports on 8-K.A Current Report on Form 8-K was filed on April 14, 2004 reporting an other event under Item
7 of Form 8-K.A Current Report on Form 8-K was filed on February 17, 2004 reporting an other event under
Item 5 of Form 8-K.4.
    Exhibits, Including Those Incorporated by Reference.The following is a list of exhibits filed as part of this annual report on Form 10-K. Where
so indicated by footnote, exhibits which were previously filed are incorporated by reference.
For exhibits incorporated by reference, the location of the exhibit in the previous filing
is indicated in parentheses.  2.1
    Unit Repurchase Agreement by and among The Hillman Companies, Inc., SunSub
Holdings LLC and GC-Sun Holdings, L.P. dated April 13, 2002. (6)(Exhibit 10.2)2.2
    Asset Purchase Agreement between Fastenal Company and The Hillman Group, Inc.
dated October 3, 2002. (7)(Exhibit 10.3)2.3
    Agreement and Plan of Merger dated as of June 18, 2001 by and among Allied
Capital Corporation, Allied Capital Lock Acquisition Corporation and SunSource Inc.
(4)(Exhibit 2.1)2.4
    Asset Purchase Agreement dated September 28, 2001, by and between SunSource
Technology Services, LLC, and STS Operating, Inc. (5) (Exhibit 2.1)2.5
    Agreement and Plan of Merger dated as of February 14, 2004 by and among the
Company, HCI Acquisition Corp. and the Common Stockholders of the Company. (2)(Exhibit
2.1)3.1
    Bylaws as adopted by the Corporations stockholders as of March 30, 2004.
(10)(Exhibit 3.2)3.2
    Restated Certificate of Incorporation of the Company as of March 30, 2004. (10)
(Exhibit 3.1)4.1
    HCI Stockholders Agreement dated March 31, 2004. (9)(Exhibit 4.1)4.2
    Amended and Restated Declaration of Trust (1)(Exhibit 4.1)4.3
    Indenture between the Company and the Bank of New York (1)(Exhibit 4.2) 70




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4.4
    Preferred Securities Guarantee (1) (Exhibit 4.3)4.5
    Rights Agreement between the Company and the Registrar and Transfer Company
(1)(Exhibit 10.5)4.6
    Amendment No. 1 to the Rights Agreement dated June 18, 2001. (8)(Exhibit 4.6)4.7
    Amendment No. 2 to the Rights Agreement dated February 14, 2004. (8)(Exhibit 4.7)4.8
    Hillman Investment Company Stockholders Agreement dated March 31, 2004. (9)
(Exhibit 4.2)4.9
    Registration Agreement dated March 31, 2004. (9) (Exhibit 4.3)10.1
    Credit Agreement dated as of March 31, 2004 by and among The Hillman Companies,
Inc., Hillman Investment Company, The Hillman Group, Inc., Merrill Lynch Capital as
Administrative Agent, Issuing Lender and Swingline Lender, JP Morgan Chase Bank as
Syndication Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and JP Morgan Securities as Joint Lead Arrangers and Joint Lead
Bookrunners. (9) (Exhibit 10.1)10.2
    Loan Agreement dated as of March 31, 2004 by and among The Hillman Companies,
Inc., Hillman Investment Company, The Hillman Group, Inc., and Allied Capital
Corporation. (9) (Exhibit 10.2)10.3
    Subordination and Intercreditor Agreement dated March 31, 2004. (9) (Exhibit
10.3)10.4
    The Hillman Companies, Inc. 2004 Stock Option Plan. (9) (Exhibit 10.4)10.5
    * The Hillman Companies, Inc Amended and Restated 2004 Stock Option Plan10.6
    Hillman Companies Employee Securities Purchase Plan. (9) (Exhibit 10.5)10.7
    Hillman Investment Company Employee Securities Purchase Plan. (9) (Exhibit 10.6)10.8
    HCI Securities Purchase Agreement dated March 31, 2004. (9) (Exhibit 10.7)10.9
    Joinder to Securities Purchase Agreement dated March 31, 2004. (9) (Exhibit 10.8)10.10
    Hillman Investment Company Securities Purchase Agreement dated March 31, 2004.
(9) (Exhibit 10.9)10.11
    Management Agreement dated March 31, 2004. (9) (Exhibit 10.10)10.12
    Employment Agreement by and between The Hillman Group, Inc. and Max W. Hillman
dated March 31, 2004. (9) (Exhibit 10.11)10.13
    Executive Securities Agreement between Max W. Hillman and HCI Acquisition Corp.
dated March 31, 2004. (9) (Exhibit 10.12)10.14
    Employment Agreement by and between The Hillman Group, Inc. and Richard P.
Hillman dated March 31, 2004. (9) (Exhibit 10.13)10.15
    Executive Securities Purchase Agreement between HCI Acquisition Corp. and
Richard P. Hillman dated March 31, 2004. (9) (Exhibit 10.14)10.16
    Employment Agreement by and between The Hillman Group, Inc. and James P. Waters
dated March 31, 2004. (9) (Exhibit 10.15) 71




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10.17
    Executive Securities Agreement by and between HCI Acquisition Corp. and James
P. Waters date March 31, 2004. (9) (Exhibit 10.16)10.18
    * Executive Securities Agreement by and between HCI Acquisition Corp. and George
L. Heredia date March 31, 2004.10.19
    * Executive Securities Agreement by and between HCI Acquisition Corp. and Terry
R. Rowe date March 31, 2004.10.20
    SunSource Inc. Nonqualified Deferred Compensation Plan dated as of August 1,
2000. (3)(Exhibit 10.1)10.21
    The Hillman Companies, Inc. Nonqualified Deferred Compensation Plan (amended and
restated). (11) (Exhibit 10.1)10.22
    First Amendment to The Hillman Companies, Inc. Nonqualified Deferred
Compensation Plan. (11) (Exhibit 10.2)12.1
    * Computation of Ratio of Income to Fixed Charges.21.1
    * Subsidiaries (As of December 31, 2004)31.1
    * Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934.31.2
    * Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934.32.1
    * Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    * Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(1)
    Filed as an exhibit to Registration Statement No. 333-44733 on Form S-2.(2)
    Filed as an exhibit to the Form 8-K filed February 17, 2004.(3)
    Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31,
2000.(4)
    Filed on June 21, 2001 as an exhibit to the Current Report on Form 8-K filed on
June 21, 2001.(5)
    Filed as an exhibit to the Current Report on Form 8-K filed on October 15, 2001.(6)
    Filed as an exhibit to Quarterly Report on Form 10-Q for the Quarter ended June
30, 2002.(7)
    Filed as an exhibit to the Current Report on Form 8-K filed on October 4, 2002.(8)
    Filed as an exhibit to the Annual Report on Form 10-K for the year ended December
31, 2003.(9)
    Filed as an exhibit to the Quarterly Report on Form 10-Q for the Quarter ended
March 31, 2004.(10)
    Filed as an exhibit to the Quarterly Report on Form 10-Q for the Quarter ended
June 30, 2004.(11)
    Filed as an exhibit to the Quarterly Report on Form 10-Q for the Quarter ended
September 30, 2004.  *
    Filed herewith. 72




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. THE HILLMAN COMPANIES, INC. Date:      March 25, 2005
    
    By:
    
    /s/ James P. WatersJames P. WatersTitle:
    
    Chief Financial
Officer and DulyAuthorized Officer
of the Registrant(Principal
Financial Officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated below. Signature
    
    Capacity
    
    Date/s/ Max W. Hillman
    
    Principal Executive
    
    March 25, 2005Max W. Hillman
    
    Officer and Director/s/ Peter M. Gotsch
    
    Chairman and Director
    
    March 25, 2005Peter M. Gotsch/s/ Harold J. Wilder
    
    Principal Accounting Officer
    
    March 25, 2005Harold J. Wilder/s/ Andrew W. Code
    
    Director
    
    March 25, 2005Andrew W. Code/s/ J. Mark MacDonald
    
    Director
    
    March 25, 2005J. Mark MacDonald/s/ Mark A. Dolfato
    
    Director
    
    March 25, 2005Mark A. Dolfato/s/ Larry Wilton
    
    Director
    
    March 25, 2005Larry Wilton/s/ Maurice P. Andrien, Jr.
    
    Director
    
    March 25, 2005Maurice P. Andrien, Jr.
 73